Mortgage Interest Deductions
As I've been house shopping in recent months I've spent a lot of time trying to calculate mortgage payments in my head. I can't. The reason is that the exponentials in the formula are too tough to approximate unless you're a savant. So I wrote up a page about how compound interest is calculated on mortgages, and seeing the interest piling up got me thinking about the vaunted tax deduction for mortgage interest.
You can deduct the interest you pay the mortgage lender in any given year from your Federal income taxes if you itemize, filing Schedule A. You can also deduct your local real estate tax. By filing Schedule A, you lose the standard deduction, which is currently $5,150 for an individual or $7,550 for a head of household.
But it's not such a simple calculation for most people. If we ignore the standard deduction by assuming, say, you would have gotten there with charity, state taxes or health expenses in any case, we can just look at the tax brackets. If you're wealthy and paying in the highest income bracket of 35%, then as long as you don't run afoul of the AMT (Alternative Minimum Tax), you're getting a 35% discount on your mortgage payments through the reduction in your income taxes. However, if you're in the 15% tax bracket and you really need the money, you're getting a 15% discount on your mortgage. Put simply, the mortgage deduction favors the wealthiest taxpayers.
The mortgage deduction also works against home buyers who are starting out in life. The interest you pay on your mortgage drops as the years pass, and in the final years, you probably won't even bother filing Schedule A unless you have the state and local taxes to make it worthwhile. At the same time, your income is likely to rise over the years, and as you work your way up into a higher tax bracket, your mortgage deduction is becoming less and less. This may inspire some people to buy new homes and take out larger mortgages, but the only way this can be justified as an investment is if housing prices continue to rise.
I get a big kick out of the Housing Cost Calculator sponsored by the Center for Economic and Policy Research because it's predicated on the notion that housing is way overvalued in pretty much all markets and will eventually return to trend. The only possible tax benefit of losing a ton of money by owning real estate is if you own it for your business and are depreciating it all along. If you sell it for less than you paid for it, at least there will be less capital gains tax recaptured.
You can deduct the interest you pay the mortgage lender in any given year from your Federal income taxes if you itemize, filing Schedule A. You can also deduct your local real estate tax. By filing Schedule A, you lose the standard deduction, which is currently $5,150 for an individual or $7,550 for a head of household.
But it's not such a simple calculation for most people. If we ignore the standard deduction by assuming, say, you would have gotten there with charity, state taxes or health expenses in any case, we can just look at the tax brackets. If you're wealthy and paying in the highest income bracket of 35%, then as long as you don't run afoul of the AMT (Alternative Minimum Tax), you're getting a 35% discount on your mortgage payments through the reduction in your income taxes. However, if you're in the 15% tax bracket and you really need the money, you're getting a 15% discount on your mortgage. Put simply, the mortgage deduction favors the wealthiest taxpayers.
The mortgage deduction also works against home buyers who are starting out in life. The interest you pay on your mortgage drops as the years pass, and in the final years, you probably won't even bother filing Schedule A unless you have the state and local taxes to make it worthwhile. At the same time, your income is likely to rise over the years, and as you work your way up into a higher tax bracket, your mortgage deduction is becoming less and less. This may inspire some people to buy new homes and take out larger mortgages, but the only way this can be justified as an investment is if housing prices continue to rise.
I get a big kick out of the Housing Cost Calculator sponsored by the Center for Economic and Policy Research because it's predicated on the notion that housing is way overvalued in pretty much all markets and will eventually return to trend. The only possible tax benefit of losing a ton of money by owning real estate is if you own it for your business and are depreciating it all along. If you sell it for less than you paid for it, at least there will be less capital gains tax recaptured.
posted by Morris Rosenthal | 8:21 AM
<< Home