Money Myths

5 Money Myths About Housing And Taxes That Can Cost You Big!

by KNS Financial on August 25, 2011

Many of us grow up hearing various sayings about money. Some of them are passed down as wise quotes, while others may be pieces of advice given to us by by someone trying to help us out. A small number of these things turn out to be good, sound advice; however, the majority of them are really nothing more than money myths!

Recently, Investopedia posted an article giving 10 “bank-breaking” money myths. Because I love reading and analyzing these ideas, I thought it would be good for us to take a look at them here.

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First we will look at housing and tax money myths, and then we will look at investment and credit-related financial misconceptions!

Money Myths About Housing And Taxes

If I Get A Raise That Bumps Me Into A Higher Tax Bracket, I’ll Actually Take Home Less Money

Since I have clients that come to me for tax preparation, I hear this one all the time. It is completely false to assume that you will actually take home less (or even the same amount) money because a raise or annual bonus has pushed you into a higher tax bracket.

The reason for this is that our tax system is set up in such a way, that your income is taxed in tiers. When you move into a higher tax bracket, what really happens is that the rate of tax that you pay on the last dollars you earn increases. This is known as your marginal tax rate – which is broken out on these income tax rate tables.

In short, only the amount that pushed you over your former threshold will be taxed at the higher rate. All other dollars earned up to that point will be taxed at lower rates (again, this is broken out in detail in the linked tables).

Renting Is Like Throwing Away Money

This is probably the one that I hear most often – because I am renting. People always tell me that I’m throwing my money away, and that I should go out and borrow hundreds of thousands of dollars in order to put a stop to this (even when I tell them that I am trying to pay off debt, they still insist)! But, does this money myth really make sense? Of course not (which is why I asked the question ;-))!

Here is how you can tell if you are throwing your money away as a renter: When you pay your rent each month, do you get anything in return? If not, then you are being ripped off and indeed throwing your money away. However, if you are getting anything in return (such as A PLACE TO LIVE!!!), then don’t worry, you aren’t lighting dollar bills on fire!

Of course, if you are paying too much for your rent, that’s a different story.

The Investopedia article made a good analogy:

Do you consider the money you spend on food to be thrown away? What about the cash you spend on gas? Both of these expenses are for items you purchase regularly that get used up and appear to have no lasting value, but which are necessary to carry about daily activities. Rent falls into the same category.

I won’t go into all of the other reasons why this thought doesn’t make sense, or how you “throw away money” (by using the same logic) as a homeowner, because that will take up the entire article. I believe that simply focusing on just how illogical this money myth actually is, will show that it’s wrong.

Paying for a service, experience, or even a temporary possession are all valid ways of spending your money, and they should be evaluated just like all other expenses. You want to avoid paying more for something than the value that it holds for you.

Income Tax Is Illegal

This is a funny one that I hope is finally dying down. I know that there are many reasons given for this. I have heard the two mentioned in the original article – the tax code states that paying taxes is voluntary, and the IRS is not an agency of the United States.

Without going into all the detail – thankfully, the IRS addresses most of the common myths here – these statements are all false! You have to pay whatever taxes you owe according to the tax code.

Home Ownership Is A Surefire Investment Strategy

I guess this is why renting equates to throwing your money away! Even after almost four years with the housing market being in the tank, and many “investors” left holding onto multiple mortgages on properties in various counties/states, begging the government and the banks for a bailout; you can still hear people holding on to this myth.

I won’t write about how housing performed as an “investment” before 2002 – because I would only receive comments about that one point, and everything else would be ignored (I’m not sure why housing is such an emotional topic).

Let me just state that the housing market is just like any other market in which people invest. There will be people who make money no matter what the economy is doing, and there will be people losing money at all times as well.

There is risk in all types of investments, we will always face trade-offs, and whether you are investing in your education, housing, stocks, or even your own business, you can’t avoid it!

One of the major advantages of home ownership is being able to deduct your mortgage interest

So many people justify borrowing tons of money for a place to live, by talking about deducting the interest on their mortgage. Unfortunately, they believe this because there are a few things about this deduction that they probably don’t realize.

First, this benefit is usually not available to homeowners who claim the standard deduction. That means that millions of people will see no benefit at all based on their current tax situation.

Also, because of the nature of a deduction (read our complete explanation of tax deductions and credits), they will only receive a partial (probably around 25% or less) savings on their tax bill.

It is nice that they government decides to partially subsidize home ownership by offering tax benefits, but this really shouldn’t be considered when you are deciding to take out a mortgage!

Reader Questions

  1. How many of these money myths have you believed at some point in the past?
  2. Which ones do you still think may be true?
  3. How do myths that have been proven wrong time and time again, continue to stay popular across generations?

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