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I have never owned a home until a couple of years ago. I always heard that you can write off the interest on your home loan. I paid 15K in interest last year, and it looks like I am only going to get back less than 1K. That doesn't seem like much of a tax break to me.
I would be very grateful if someone could explain this to me.
I have never owned a home until a couple of years ago. I always heard that you can write off the interest on your home loan. I paid 15K in interest last year, and it looks like I am only going to get back less than 1K. That doesn't seem like much of a tax break to me.
I would be very grateful if someone could explain this to me.
You are not supposed to get it back. You deduct it from your taxable income which means you pay it with before tax money. 1k is better than nothing.
First, as Suzie02 points out, it's not a tax credit, which comes right out of the taxes you would otherwise owe, it's a deduction from income. (By the way, did you make sure to deduct your property taxes, which you also get to do?)
Second, you're confusing the size of your refund with the amount you saved. It would be a simple matter to recompute your tax return without the mortgage interest deduction and see how much it saved you. It's probably a good bit more than $1,000. The size of your refund is a function of the difference between what you wound up owing and what was withheld. If you want a bigger refund, increase your withholding, but it's not really better for you to not have that money through the course of the year, just to get a lump sum (you'll often hear your refund referred to as an interest-free loan to the government) when you file in April.
One other thing--once you own your home you get to deduct some other deductions that were never enough to amount to anything before you had the interest deduction and that made it worthwhile to itemize.
You are not supposed to get it back. You deduct it from your taxable income which means you pay it with before tax money. 1k is better than nothing.
Thank you. That makes sense.
Quote:
Originally Posted by jackmccullough
You're confusing two sets of concepts.
First, as Suzie02 points out, it's not a tax credit, which comes right out of the taxes you would otherwise owe, it's a deduction from income. (By the way, did you make sure to deduct your property taxes, which you also get to do?)
Second, you're confusing the size of your refund with the amount you saved. It would be a simple matter to recompute your tax return without the mortgage interest deduction and see how much it saved you. It's probably a good bit more than $1,000. The size of your refund is a function of the difference between what you wound up owing and what was withheld. If you want a bigger refund, increase your withholding, but it's not really better for you to not have that money through the course of the year, just to get a lump sum (you'll often hear your refund referred to as an interest-free loan to the government) when you file in April.
One other thing--once you own your home you get to deduct some other deductions that were never enough to amount to anything before you had the interest deduction and that made it worthwhile to itemize.
I understand. Yes, I did deduct my property tax. I am still figuring out how much our withholding should be to get the smallest refund without owing. I don't like giving an interest free loan to the gov't!
One other thing to consider, if you didn't have the mortgage interest you would still have the STANDARD DEDUCTION (about $11K or so IIRC) so you're only getting the marginal deduction between the standard and itemized deductions.
If you can afford to pay down the loan quickly you'll see that paying ONE DOLLAR to the bank in order to avoid paying TWENTY CENTS to the government is a fool's game.
One other thing to consider, if you didn't have the mortgage interest you would still have the STANDARD DEDUCTION (about $11K or so IIRC) so you're only getting the marginal deduction between the standard and itemized deductions.
This is a point that should be emphasized. If you already itemize and are in the 25%/28% bracket and have a 3000/month mortgage payment, the deduction is HUGE.
If you don't have a single dollar of things to itemize and you're in the 15% bracket and have a 1500/month mortgage payment, the deduction is worth almost nothing.
Tax benefits are very, very individual. It's important to understand that you must itemize to get the benefit of the deduction. The actual benefit of the deduction is your (mortgage interest + other itemized deductions - STANDARD DEDUCTION) * tax rate. If "other itemized deductions" is > standard deduction, you get the full value of the mortgage interest * tax rate.
The mortgage interest deduction is an incredibly valuable tool for relatively high income people to reduce their tax bill - since they will often have a lot of other stuff they can itemize. It is generally worth very little to people who don't make that much money or don't have an expensive house.
This is a point that should be emphasized. If you already itemize and are in the 25%/28% bracket and have a 3000/month mortgage payment, the deduction is HUGE.
If you don't have a single dollar of things to itemize and you're in the 15% bracket and have a 1500/month mortgage payment, the deduction is worth almost nothing.
Tax benefits are very, very individual. It's important to understand that you must itemize to get the benefit of the deduction. The actual benefit of the deduction is your (mortgage interest + other itemized deductions - STANDARD DEDUCTION) * tax rate. If "other itemized deductions" is > standard deduction, you get the full value of the mortgage interest * tax rate.
The mortgage interest deduction is an incredibly valuable tool for relatively high income people to reduce their tax bill - since they will often have a lot of other stuff they can itemize. It is generally worth very little to people who don't make that much money or don't have an expensive house.
You folks are awesome!
We are not rich. But we do better than many.
I have been using Taxactonline.com for many years. The software figures out for me if I am better off itemizing or not. Sometimes we do, but not usually. I haven't got all of my documentation yet so I have only done part of my tax return.
This is a point that should be emphasized. If you already itemize and are in the 25%/28% bracket and have a 3000/month mortgage payment, the deduction is HUGE.
Not to get off on a tangent, although we have already answered the OP's question but, IIRC it's only about 25% +/- of tax filers who take advantage of this, and as the good Dr points out, it's primarily a benefit to upper bracket filers.
Even G.W. Bush found out that trying to eliminate this sacred cow is easier said than done. I for one would like to see it phased out for a number or reasons.
golfgod
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Mortgage deductible
