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.