Is paying off a mortgage early beneficial tax wise?
The following is from
http://www.usnews.com/money/personal-finance/retirement/articles/2008/06/19/should-you-pay-off-your-mortgage-before-you-retire.html
"The interest you pay on your home mortgage is tax deductible on up to $1 million in debt. You can also typically write off interest on up to $100,000 of home-equity debt. But you benefit from this tax perk only if all your itemized tax deductions, including your mortgage interest, add up to more than the standard deduction that almost everyone gets automatically….. Jonathan Pond, a financial planner and author of Grow Your Money! 101 Easy Tips to Plan, Save, and Invest, argues that you need to be in the 35 percent tax bracket, or make at least $350,000 annually, for the tax break to be worthwhile. Most Americans in the 25 percent tax bracket might pay, say, $10,000 in mortgage interest but save only $2,500 in taxes."
If I pay $10,000 in mortgage interst but only save $2,500, that seems nonsmart to me. Is the above quote correct?
How much would you have in itemized deductions if you could not deduct your home mortgage interest and property tax? Subtract that from the standard deduction for your filing status. If you take standard deduction, you can consider that a freebie because you get not tax benefit from mortgage interest or property tax on that amount on that amount. If, for example–and I’m just making up the numbers here–you are married and the standard deduction is $11,400 for 2009, your mortgage interest is $10,000, property taxes are $2,500 and your other itemize deductions total $3,900 for a total of $16,400, your tax savings will be your marginal rate times $5,000. Unless you give a huge amount to charity, it would probably be a smart move to pay off the mortgage if you can.
Let’s see.
If you are married, you automatically get a $11,400 exemption. So if your itemized deductions, including the $10K in interest, are only $15000, you save very little. At 15%, you save $540 on your taxes. So, if you have enough liquidity to pay off the loan, yeah, spending $10,000 to save $540 is kind of worthless.
Most people don’t have the liquidity.
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>>>>If I pay $10,000 in mortgage interest but only save $2,500, that seems non-smart to me. Is the above quote correct?<<<<
Yes.
You never want to pay interest just to get a tax deduction. In your above example, you would still be out $7500.
Human nature tends to interfere with common sense sometimes. First of all, people tend to look at taxes in a vacuum. The look at their taxes alone without looking at the other factors. A client of mine once said: "I want to be the person who pays the most taxes. Do you know why?" I responded: "Because it means that you made the most money!" "Exactly", he said. Secondly, people don’t like paying more to the IRS than they have to. Somehow, paying $10k in interest to save $2500 in taxes is their way of sticking it to the man. Financially, it is not a smart move, though.
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How much would you have in itemized deductions if you could not deduct your home mortgage interest and property tax? Subtract that from the standard deduction for your filing status. If you take standard deduction, you can consider that a freebie because you get not tax benefit from mortgage interest or property tax on that amount on that amount. If, for example–and I’m just making up the numbers here–you are married and the standard deduction is $11,400 for 2009, your mortgage interest is $10,000, property taxes are $2,500 and your other itemize deductions total $3,900 for a total of $16,400, your tax savings will be your marginal rate times $5,000. Unless you give a huge amount to charity, it would probably be a smart move to pay off the mortgage if you can.
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paying off a mortgage if you have the money will save you the interest you might have paid over the life of the loan–sometimes, the interest alone is nearly as much as the original price of the house, spread over the life of the mortgage
if you have that liquidity invested at decent returns, and barring the fluctuation of the economy, you might make more in that time of the loan—big gamble
however, paying the mortgage guarantees you probably will itemize for many, many years, also taking advantage of other subjects of itemization that might be lost if you could not exceed standard deduction
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