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There is barely any benefit assuming you're buying an average or below average priced house.
If you're single, you buy a $180K house; put 20% down and finance $150K. Your first year's interest on the mortgage is $5,850. Assuming that your property tax is $1,300. The itemized tax deduction add up to $7,150. The standard deduction is going to be about $6,400. That means, your tax deduction will be your federal tax bracket rate (assuming it's 20%) times $750 = $150.
That's a whopping $150 savings per year IF you're single, and that tax saving amount is shrinking EVERY year as your interest payment decreases. By year 3, the standard deduction will probably be more than your $7,150 itemized deduction number.
If you're married. Forget it! You will need to buy a $360K house to get that mere $150 dollar tax savings for the first year or two.
When you itemize, you can deduct property tax, charity and state and local taxes too, along with your mortgage interest, that will get the number far above the standard deduction.
Location: IN>Germany>ND>OH>TX>CA>Currently NoVa and a Vacation Lake House in PA
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Quote:
Originally Posted by Quaker15
Am I missing anything here?
You are absolutely missing something. You don't specify, but what's your alternative? If it's not living with mommy and daddy you're going to pay rent. Do you think there's no property tax involved there? Trust me, your land lord is paying property tax and passing that cost on to his tenants. Just because you don't see it in a line item doesn't mean you aren't paying it.
most renters do not itemize , they actually do spend less in deductible items so tax wise they fly the empty seats .
they likely get money back via the standard deduction that they never spent in the first place unlike the homeowner who may very well spend those deductible items .
remember we are talking tax wise here not overall cash flow .
based on median incomes most homeowners can't get over the standard deduction either so they get nothing for their ownership . the ability to itemize deductions gets higher as incomes get higher an exceeding th standard deductions on any large scale does not happen until well above median incomes .
I agree, the benefit is overstated in many cases. HOWEVER, if you have other deductions for which you qualify, the mortgage deduction can cast you into the realm where you now get value out of those other itemizable deductions. Also, at come critical points the deduction might keep some of your income out of the next higher tax bracket, the most critical of which might be the jump from 15% to 20%.
When you itemize, you can deduct property tax, charity and state and local taxes too, along with your mortgage interest, that will get the number far above the standard deduction.
And more. Medical/dental expenses, medical insurance premiums (nearly 10k in our two adult house, one with medicare, the other on a "cheaper" BC/BS individual policy with a 5k deductible!) Investment expenses. Property tax on our cars. Sales tax.
But Mathjak is absolutely correct. As the years go by, our RMD will increase resulting in increased taxable income. And each year, the amortization of our mortgage produces a smaller interest deduction. Eventually, it will make probably more sense to pay off the 3.5% mortgage. (Unless medical expense and insurance deductions get 100% treatment. I've never understood WHY they are subject to a floor. Quite unfair, in my view.)
That said, we didn't buy our house for tax reasons. We bought it for a HOME.
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