Passionate Pursuit of Purpose

Should I keep a mortgage for the tax deduction?

Posted by on Mar 23, 2013 in Perfect questions, Personal Finance | 2 comments

How big is the Mortgage interest deduction?Home

We often hear, “you should keep a mortgage on your home for the tax deduction.”  I am going to explore this statement, by using actual numbers from a tax return I prepared.

Ed and Daisy (names changed to protect innocent and guilty) are married with 3 children with an AGI of $99,318. They itemize deductions (pre 1986 referred to as long form) rather than take a standard deduction.  Below is a list of their itemized deductions.

Deductible medical expenses $0
State income tax paid $4,542
Real estate tax paid $583
Other personal property tax $383
Mortgage interest paid $7,010
Mortgage insurance premiums $520
Charitable contributions $223
Misc deductions $0
Total Itemized deductions $13,261

Ed and Daisy deducted $13,261 from their taxable income.  If they had not itemized, they would have only been able to take the standard deduction of $11,900.  Oh wait, they would have still had $11,900 deducted if they had not itemized!  So the real deduction gained from them itemizing was the difference between the standard deduction and their itemized deductions.

Itemized deduction $13,261
Standard deduction $11,900
Increase in deduction from Itemizing $1,361

So Ed and Daisy spent $7,010 on mortgage interest and only received a deduction of $1,361.  They are in the 15% tax bracket.  This means they saved $204 by itemizing.  They gave the bank $7,010 and saved $204 on their tax return.

Anyone who tells you to have a mortgage for the tax deduction doesn’t understand math.  I understand buying a home and using a mortgage to finance it.  I have a small mortgage on my home.  Don’t buy a home to save on taxes.

We buy a house to turn it into a home filled with love and laughter. Not to save on taxes.