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|
|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.
|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.