“Oh, But That’s Tax Deductible”

Those famous words, when someone gets exited about being able to buy a new car, or maxing out on their mortgage interest deduction, or taking friends out for dinner with hopes they’ll become business customers, or charitable giving…

We’ve been researching some of the math on the mortgage interest deduction – – assessing a $100k down payment on a home, vs renting and making a $100k investment into an asset such as the stock market.

Investing in the Stock Market or Real Estate

Heard a story about someone who conducted an experiment when they first became a small business owner – essentially replacing their W2 with a 1099, converting their employer into a ‘customer’.

To reduce taxable income, they went out to eat as often as possible and rented a luxury car to get to their job.

At the end of the year, they looked back and realized that they certainly had a low taxable income… but it wasn’t until years later, they looked back and realized that they had virtually no increase in their net worth from that period of income.

Maxed out on tax deductions, but actually achieved no gains in net worth.

They quickly came to the conclusion that “tax deductions don’t make you rich”.

pH14 Plan doesn’t provide investment advice, nor any tax advice, and everybody’s financial goals are different.

That said, While people might be able to deduct a portion of the meal… Eating out with friends, will not make you wealthy, UNLESS those friends end up buying lots of goods and services from you later.

And While they might be able to deduct a portion of the lease… Renting luxury cars will not make you wealthy, UNLESS prospective clients end up buying high value goods and services from you later.

Similarly, there are other tax deductions… in recent years, the 401(k), IRA, 457 plan, and others have been tax deductible retirement plans. Like eating out and renting lux cars, these plans alone will NOT make you wealthy, UNLESS you manage them wisely.

Do your own math to determine a plan for how to achieve your financial goals.  Calculate where there is possibility of achieving a higher ROI.

Will eating out often over the next 5 years and renting a luxury car be more advantageous to your total net worth after 5 years? Pull out your spreadsheet and do the math…

Or, will FINDING and developing an investment plan for placing your hard earned dollars into fast moving companies during moments of volatility even potentially help you achieve a higher ROI?

How Do You Like the Volatility?

There is no guarantee that tax deductions will make you rich – to the contrary, you can spend everything away and have nothing to show for it but lots of paper receipts to scan into your tax planning software.

We recently heard another idea from someone who was aiming to reduce their AGI to pay fewer student loans, and wanted to use their 529 Plan. Literally they said, I’ll dump the max into the 529 Plan for 10 years to avoid increased payments (since on IBR), and will begin thinking about actually building wealth starting in 10 years!

Wow. Obviously this person wants to build their net worth, but intends to delay for 10 years. Realize the consequences of delaying, but just 10 years! There are consequences to over thinking your tax planning… literally, we walked through our math on this 10 year delay. Feel free to do your own math.

Consequences to Over thinking the GOP Tax Bill

pH14 Plan doesn’t provide investment advice nor any tax advice.

Consider creating a plan with someone who is…

  • good at math,
  • knows how to construct formula’s replicating compounded interest,
  • knows the tax laws, and
  • knows various investment strategies.

Spend a morning with them, discussing how to use tax deductions to GROW your net worth. Ask the hard questions. Work through the math with that individual.

Calculate the MAX gain achievable in decade allotments using retrospective assessments over the last 40 years – from the 529, IRA, 401k, 457 plans, and TSP.

In which are you able to buy with margin? Options? Leveraged ETF’s? Even straight KO shares with no leverage? KNOW the answers to these questions and crunch the numbers.

Then you’ll be armed with more data to support your investment decisions.

Author: pH14 Plan Staff

pH14 Plan is an economic development model for all U.S. households' participation. You can support this research by subscribing for more access, or contact us to make a gift.

Leave a Reply