Tax season is the perfect time to personally discover the deception of a still too frequent claim that the mortgage interest tax deduction is a good reason to enter into or keep a mortgage.
If you haven't heard, the sales pitch goes something like this...
"The interest on your mortgage is tax deductible, and therefore the goverment is helping you pay it..."
followed by a primitive example:
"Suppose you pay, say, $18,000/year in mortgage interest and you're in the 30% tax bracket. Well, this means you'll save 30% of $18,000, or $5,400 on taxes. Your mortgage only cost you $12,600. Isn't this great?"
The corollary, of course, is if you didn't have a mortgage, you'd give up $5,400 of tax savings! That would be stupid, wouldn't it?
In the U.S., you've either just finished or are about to complete 2007 taxes. (Those of you filing extensions know you're only extending the time to file the return. Taxes are due on April 15, so you still need to do the math.) Since you're fresh from your encounter with the tax labyrinth, you know one additional
important points in this analysis:
Your Standard Deduction.
Returning to our primitive example, of $18,000 interest and 30% tax bracket, we add the Standard Deduction. For married couples filing jointly, this deduction is $10,700.
So, to understand the real tax value of $18,000 of paid interest, subtract $10,700 from $18,000 and the value of your wonderful $18,000 deduction shrinks to $7,300.
30% of $7,300 is $2,190...
Yes. That's right. You've paid $18,000 to get a $2,190 tax benefit.
Or, another corollary...
If you didn't have a mortgage costing you $18,000 in interest, you would have to pay the entire $2,190 to the government!
And, of course, you'd be $15,810 richer.
Look at your tax return and do this simple analysis: Take out your mortgage interest deduction and see how your tax liability changes. You're in for quite a surprise.
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Greg Moore is the Architect of the Debt Freedom System,
'DebtIntoWealth -- Lessons from My Journey to Debt Freedom."
http://www.debtintowealth.com/debttrap.html
