Reasons Why You Probably Can’t Count on a Mortgage Tax Deduction

by Guest

The government provides the public with a vast array of tax-based incentives to go out and acquire property, but folks tend to get carried away with notions of government generosity. One of the more commonly inflated expectations of the American tax code is the value of the mortgage tax deduction. For many Americans, it’s a big incentive to pursue homeownership.

Unfortunately, the numbers just don’t add up to what people conjure inside their heads. While additional home-related deductions might help make the mortgage deduction a worthwhile reason to own a home, the prevailing principle seems to be that homeowners and homebuyers shouldn’t get their hopes up. Why is that? Because most people forget about the standard deduction.

People get really excited when they factor a year’s worth of mortgage payments into their tax deductions. If you were making a $1200 mortgage payment for a year, then intuition dictates that you’ll get a $15,000 deduction. But some quick math and common sense completely dissolves such an expectation. It’s estimated that 75 million Americans own homes. Let’s say the average homeowner dished out $12,000 in mortgage payments every year. That would equate to nearly one trillion dollars in deductions every year.

The government can be stupid, but it isn’t that stupid. People forget that prior to home ownership they were already receiving a standard deduction. Itemizing a home only entitles you to the leftover difference between the standard deduction and your mortgage payment amount. In 2010, the joint standard deduction was $11,400, so an idealized $15,000 tax deduction turns into a relatively paltry $3600.

But this only matters to those who compile mortgage payments that exceed the standard deduction. Those with mortgage payments that don’t surpass the standard deduction have virtually nothing to gain from the mortgage tax deduction. This matters in long-term mortgage payment plans as well because most mortgages lessen in payment amount over time, which obviously decreases the powers of mortgage deduction as time goes on.

Simply put, the mortgage tax deduction should not be the basis for buying a home. The idea that mortgage payments can be transferred into an equal lessening of tax burden is a fallacy for everyone except those with enormous mortgage payments and a list of itemized deductions. If you want to own a home, do so for the right reasons – not because of the mortgage tax deduction.

This is a guest post from an anonymous blogger.

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{ 9 comments… read them below or add one }

krantcents August 8, 2011 at 7:57 am

I expect the tax code to change in the next few years, but housing is too important for the economy to just do away with the deduction.It could be reduced or changed!

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Cassie August 8, 2011 at 8:27 am

It is important to reiterate:
1) Home Mortgage Interest is a tax-deductible expense available only to those that itemize. Many who own homes do not have deductions that exceed their standard deduction so they get no tax benefit from the interest.
2) Only the interest & taxes NOT principal or insurance are deductible. If your total monthly payment is $1200.00 on a 150,000 loan at 4% for 15 years, your first years interest paid will be aprox $6K and it will decrease every year.
3) This is a deduction NOT a credit. A credit lowers your taxes dollar for dollar. A deduction of $3600 for someone in the 25% tax bracket lowers taxes $900.

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Brave New Life August 8, 2011 at 8:57 am

On top of this, it’s a deduction, not a credit. Which means that you only get your marginal tax rate back from the deduction amount. If you are in the 28% tax bracket, this means $15K in mortgage payments equals $3600 deduction, resulting in just $1008 back to you. It’s money I wouldn’t turn down, but it’s not a defining reason to own a home.

This coming year will be my first year in a decade where I will not exceed the standard deduction, so owning a home does nothing for me except hedge against inflation.

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Super Frugalette August 8, 2011 at 9:39 am

Agreed. In some areas of the country where housing is cheap…this doesn’t matter at all.

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SB @ One Cent At A Time August 8, 2011 at 11:24 am

This is eye openning knowledge for me, I am in market for first time home. And all along I was banking in on the deduction. Great help to me

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Squirrelers August 8, 2011 at 4:56 pm

Totally agree that a mortgage tax deduction isn’t a basis for home purchases. This can’t be counted on in the future, given our present-day reality.

I always shake my head when I read or hear people talk about how it’s good to take on a bigger mortgage because you’ll get a deduction. Argued once with someone totally convinced she was right and I was foolish. Gave up and thought she’ll have to learn on her own!

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cashflowmantra August 9, 2011 at 7:36 am

The thing is that so few people truly understand this. It is actually a sneaky way of fooling the middle class into thinking that they are getting something when in fact, they really aren’t. Inflation works the same way. Print more and more dollars lowering the purchasing power of those dollars. This allows the rich to increase prices blaming inflation while the middle class accepts it as destiny. Thus the wealth gap widens from a weak dollar.

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Khaleef @ KNS Financial August 9, 2011 at 2:34 pm

This is something that I am constantly explaining to people. Actually, you are only able to deduct the interest that you pay – not the entire payment. Many people use this deduction as a justification for going out and borrowing 10 times their annual gross salary; but unfortunately, the numbers usually don’t add up!

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Evan August 11, 2011 at 1:01 pm

Usually the same people who justify a large restaurant bill or car lease because they get a deduction through their solely owned business.

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