The Mortgage Interest Deduction

[pcooley]

I often read that the one good thing about having a mortgage is the mortgage interest deduction.

I do my taxes by Turbo Tax every year, and we have never - ever - benefitted from the mortgage interest deduction. The software always says that our personal deduction is greater than our itemized deductions, of which, I assume, the mortgage interest is a part.

At its height, we were paying around $450 a month on mortgage interest. We've got that down to $140 a month currently.

Occasionally, I become paranoid that I'm doing something wrong on Turbo Tax. Are most people able to take advantage of the mortgage interest deduction? What's going on with us?

I'm still aiming to pay the mortgage off by June of 2015. And I still hope I'm doing the right thing.

[sweetana3]

They are paying a whole lot more than $450 per month in interest. We can itemize due to taxes, both state and RE, and charitable contributions. After this year, we drop one house's RE taxes and, unless we increase our charitable contributions, will no longer be able to itemize our deductions. For us, any interest would cause us to be able to itemize and we would "save" whatever % is our tax rate for the year. (but we have no need to borrow from someone else)

The statement that interest is a good thing is 1) a big generalization and 2) a banker's selling ploy for those who don't understand taxes.

Most individuals do not realize that even if you itemize, it is only the excess over the standard deduction that is of any benefit at all and then only a % of the excess comes off and it depends on your tax bracket. Most people I have tried to explain this too just have their eyes glaze over.

[herbgeek]

I ask people if you give me a dollar, and I give you back 28 cents, would you think that's a good deal? That's kind of what the mortgage deduction is like. Yes, 28 cents is better than getting no cents back, but in either case you still had to spend the dollar. When your mortgage is paid off, you are no longer spending the dollar. You are no longer getting the 28 cents back either, but you are still ahead of the game.

[catccc]

One of my biggest pet peeves, misunderstanding of itemized deductions!

Years ago, as a single person with a relatively high income, I ended up able to itemize deductions one year just due to state and local taxes. And not paying taxes state and local taxes was not an option, so I appreciated that.

I'm pretty happy these days with the standard deduction. I'm currently a renter. With a one income family of 4, the tax bite is pretty small, so I'm grateful for that! I'll take the "freebie" standard deduction over paying out mortgage interest any day.

We do want to buy a home, though. But certainly not so we can get 25 cents for every $1 I give to the bank...

[SteveinMN]

For what it's worth, the mortgage here is still so new that we do get a benefit from the mortgage tax deduction. Just works out that way.

[Dhiana]

A recent artictle in the New York Times talks about this very thing...who really benefits from the mortgage interest deduction?

http://www.nytimes.com/2012/10/28/realestate/mortgages-who-really-benefits-from-interest-deductions.html?src=recg

When I volunteered for VITA there wasn't a single person who I encountered that could take advantage of this interest deduction.

So I doubt TurboTax is stearing you wrong but it's good that you are double checking :)

[lhamo]

Agree that the mortgage interest deduction is only a benefit for those with large mortgages. Especially if you have kids -- by the time you add in the standard deductions for two adults and two kids you need to pay a HUUUUUGE amount in mortgage interest every year (or have other deductions, which aside from charitible deductions are also generally limited) in order to get above the standard deduction thresholds.

Our mortgage balance is around $250k, we currently pay around $1880 a month, and interest makes up only about 1/2 of that. So that is about $11,000 in interest a year. Our standard deductions are much more than that. So even if we could deduct the interest (which I don't think we can as the property and bank are both in China), it wouldn' make sense for us to do so.

I am strongly in favor of modifying the tax code to make it simpler and more fair. I know VAT taxes are not popular, but for people who espouse simple living that kind of system seems to make the most sense. But I am also not opposed to income taxes. I voted for the income tax measure they had in Washington state last year, which unfortunately didn't pass.

lhamo

[iris lily]

sweetana, that's great advice as always from you. You give great practical advice.

We have never had a mortgage. Sometimes, in recent years, we've been able to take the itemized deduction but that's due to taxes and charitable donations. Our accountant figures our tax bill both ways and takes the path most advantages.

[iris lily]

For what it's worth, the mortgage here is still so new that we do get a benefit from the mortgage tax deduction. Just works out that way.

Agreed, with U.S amortization schedules, if you are early in your mortgage you are paying a lot of interest and so that deduction works for you. Somewhere along the way I learned that Canadian mortgages are calculated differently, but I don't know how they differ.

[sweetana3]

Iris Lily, I retired from 31 years with the IRS and have had to explain such things countless times as well as why someone has to pay their taxes. Very happy to have retired from all that and keep my involvement in taxes very minimal. It is entirely too complex. When I started, we did all our computations by hand or with a simple calculator and I could whip out an audit report in minutes. It now takes constantly updated computer programs and is more often wrong than right.

[ToomuchStuff]

One year, I figured out I might (didn't complete the math) come out ahead by $2, for itemizing my taxes (in the first year or two of buying the house). For $2, for a one time thing, it wasn't worth the hassle. (would have cost me more to take dinner to one of my IRS friends houses, to get it checked)

[heydude]

i am able to claim the mort deduction now and do benefit from it.

BUT I DREAM OF THE DAY WHEN I AM PAYING TOO LITTLE INTEREST TO QUALIFY! It sure will make my taxes easier!!!!!!!!