How big is the Mortgage interest deduction?
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.
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