Is this familiar?
You are standing around a family gathering and chatting with Uncle Steve.
You casually say you are planning to repay your mortgage early, but Uncle Steve answers immediately, “No, don’t do that. You give you a higher tax rate. You’ll lose the interest tax deduction that you’re going to push. The only reason you don’t repay your mortgage is to get this deduction. “
Uncle Steve’s statement is true, so he decides to repay his mortgage slowly and steadily, just like everyone else.
But there is a problem. Uncle Steve is 98% wrong with a small piece of truth.
Let’s talk through it.
90% of people do not profit
The vast majority of people (using current tax law) do not benefit from mortgage interest on their taxes. That’s right, the merit of 0.
The reason is that the only way to get some benefit is to itemize the deductions.
Itemizing deduction items means that you will have more tax deductible expenses (mortgage interest, charitable donations, etc.) than standard deductions.
And in 2022, the couple’s standard deduction is $ 25,900.
For example, suppose you and your spouse paid $ 15,000 for mortgage interest this year and donated $ 10,000 to a charity. In total, the total deductible cost is $ 25,000. However, it’s still less than the standard $ 25,900 deduction, so you get an additional zero benefit on these costs.
In other words, even if you don’t have mortgage interest and don’t give the charity a dime, you’ll still get a $ 25,900 tax deduction.
The other 10% have little benefit
But what about those who actually itemize deduction items? Is it worth it for them to have mortgage interest?
The most important thing to understand about this is that tax credits do not directly reduce your tax. It reduces your taxable income and it reduces your taxes.
For example, suppose your taxable income is 100,000 and you have to pay 15,000 taxes. However, there was interest on a 10k mortgage and I was able to deduct everything.
This means that taxable income is now $ 90,000 and the tax amount has been reduced to about $ 12,800.
This means you’ve saved $ 2,200 in taxes !!
Wait a second? ??
I paid $ 10,000 as interest on my mortgage to save $ 2,200 in taxes.
This means that you paid a mortgage company $ 1 to save less than a quarter with Uncle Sam. This is a bad deal !!
I’m not saying there’s no reason to keep your mortgage even if you can pay it off.
There can be many reasons to do this.
But doing it just for “tax credits” is often a bad reason.
Don’t believe in water cooler talk
I have seen too many bad financial decisions made for the advice of well-meaning colleagues and family.
Not all the advice given at the time of transit is bad, but don’t forget to double-check our sources before betting on our financial future.
© 2022 Darren Howes. all rights reserved. This article may not be reproduced without the express written consent of Dallen Haws.