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The mortgage tax deduction: beyond the hype

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House and Money on ScalesOne of the benefits of homeownership that many of us hear about is the mortgage interest tax deduction. After all, how many loans out there provide you with a tax deduction for the interest that you pay? (Student loans and business loans, as well as mortgages.)

But are you really benefiting from the mortgage tax deduction? And is it really something that has a big impact on your finances? As with most matters of personal finance, the answer depends on your own personal situation.

Getting the Most Bang for Your Tax Deduction Buck

First of all, the mortgage tax deduction is only available to those who itemize their deductions. Before you benefit from the mortgage tax deduction, you need to figure out whether or not you will itemize using Schedule A. If your total itemized deductions (including the mortgage deduction) amounts to less than the standard deduction, it makes no sense to itemize, and the mortgage tax deduction doesn’t help you much.

I itemize each year, since between my charitable contributions, miscellaneous expenses, unreimbursed health care costs, and mortgage deduction, my itemizations usually add up to quite a bit more than the standard deduction.

“The mortgage tax deduction best benefits those who have a high amount of interest to deduct, along with real estate taxes,” says Senen Garcia, an accountant and attorney with SG Law Group. “The best way to take advantage of this deduction is to report all interest and points.”

Since you can deduct refinancing points and other points paid related to your mortgage, is makes sense to keep track of all of this. Garcia points out that you should receive a Form 1098 from your lender, and this will have the information you need to claim the mortgage interest tax deduction.

Watch Out for Phaseouts

Like so many tax benefits now, there is a phaseout with the mortgage interest deduction.

“Limits and phaseouts are based on the level of income the taxpayer has, and these amounts are adjusted each year,” Garcia says.

The mortgage interest tax deduction is part of the recent policy on itemized deductions, put into place with the latest fiscal cliff deal. Itemized deductions are reduced by 3 percent for the amount of a household’s income over the threshold. Right now, that threshold stands at $250,000 for single filers and $300,000 for joint filers. So, consider a couple that earns $400,000 (putting the couple $100,000 over the threshold). Since 3 percent of $100,000 is $3,000, the couple’s ability to itemize would be reduced by $3,000.

Pay attention to phaseouts, and look for legal ways to reduce your income so that you can take better advantage of these limits.

If you want to see what your tax savings would be with the mortgage interest deduction, you can use one of many calculators available online. After figuring my own tax savings, I found that I can expect to save close to $2,500 in taxes this year. You, too, can get a rough estimate of what you would save — assuming you aren’t subject to phaseouts and limits, and assuming that you have other itemized deductions to make it worth it.

(Photo: Images_of_Money)

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4 Responses to “The mortgage tax deduction: beyond the hype”

  1. JoeTaxpayer says:

    There’s too much emotion and not enough logic tied to this deduction. Fortunately, you’re bringing a sane look at the topic.
    When people say “I need the deduction” as a reason for their mortgage, I respond that they must have been the kid who bought the baseball cards for the stick of gum.
    To me the math is simple, if you are in Sch A territory and taking itemized deductions, your 4% mortgage really costs 3% (for those in the 25% bracket.) If 3% debt makes sense for you, fine, if you have your emergency account funded and still have more money earning .0001%, then start to prepay the loan.

    • CS says:

      Good suggestions – many don’t have the emergency account funded, and don’t have the extras being put away. We should all remember that the final goal should be to own the property, not to keep on paying interest on a loan.

  2. Cheap Skate says:

    can you provide a link to a good calculator for california to see what your tax savings would be with the mortgage interest deduction?

  3. Unfortunately I don’t have enough other itemized deductions to get the interest deduction to work out for me. On the plus side, I’m not spending money on the other expenses they allow :)


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