The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: powersln on November 27, 2012, 08:21:16 AM
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I hear a lot of people say how awesome the mortgage deduction is. Am I missing something, or is it only helpful to people with large mortgages?
For example, I bought a house in the beginning of 2012 and started with a mortgage of $74,900 @ 3.865%. I will pay $2,871.13 in interest during 2012. I'm married, so my standard deduction will be $11,900. I won't be anywhere near the point where I could itemize on my taxes.
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Standard Deductions all the way for you. Your statement is correct. It only works for those with larger mortgages.
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I have to add that I do not see the major benefit even for people with large mortgages. How much money (interest) did you have to pay in order to have that tax deduction? True, it does reduce the effective interest rate paid; but, that money would do much better if invested elsewhere.
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I enjoyed the deduction when interest rates were higher, but now that my $150k+ mortgage is at 3%, it appears I'll be just barely above the standard deduction for tax year 2013. The deduction is definitely geared toward those with large mortgages and I doubt it's truly useful to the average (median income ~$50k/yr) American, as everyone knows the housing lobby will claim when it's up for consideration to be cut from the tax code. I personally hope the deduction goes away.
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In the purest sense all of you are correct to point out that the standard deduction is largely ignored by people when this topic arises and that you are paying $1 in interest to save some number on taxes.
What you are forgetting though is that there are other things included when you itemize, such as property taxes, local and state income taxes, medical expenses, and donations to charities. All of this can add up quick but like madage said it probably doesn't come into play that much for the median income of $50k and maybe even more because once you have high deductions you get tagged by AMT.
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I hear a lot of people say how awesome the mortgage deduction is. Am I missing something, or is it only helpful to people with large mortgages?
For example, I bought a house in the beginning of 2012 and started with a mortgage of $74,900 @ 3.865%. I will pay $2,871.13 in interest during 2012. I'm married, so my standard deduction will be $11,900. I won't be anywhere near the point where I could itemize on my taxes.
It's not that great for small mortgages, you're correct. The real estate industry has touted it like crazy to try and convince people that buying the biggest house they can possibly get is the secret to eternal wealth, savings and prosperity. With much larger loans, say on a house costing 10 times as much, that's very substantial. Considering the interest rates, it's possible that you could lock in a mortgage rate today that's effectively less than inflation after the deduction- by stashing extra payments in an investment account and just making minimum payments. Not advocating leveraging yourself like that or spending that much on a home, just saying it can be pretty powerful in some instances.
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NPR: Planet Money did an interesting little piece on Politics and Economics here. They speak about the Mortgage Interest deduction in this episode.
http://www.npr.org/blogs/money/2012/07/18/156928675/episode-387-the-no-brainer-economic-platform (http://www.npr.org/blogs/money/2012/07/18/156928675/episode-387-the-no-brainer-economic-platform)
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Mortgage Deductions to me fall into the "every little bit helps" category. My wife and I give a significant amount to charity, so it is always better for us to itemize deductions than to take the standard. If you're in that situation, then being able to deduct mortgage interest is just a little bit of free tax money back. But it's definitely not worth spending a lot more in interest in order to get back a small amount of tax.
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This won't get through unless current mortgages are grandfathered. That will kill a lot of motivation for people to move and have at least a couple of years of negative impact on the housing market, especially in more expensive areas. I already changed my plans once when the ability to roll over basis into a move up home went away. At some point in the future, another nice Silicon Valley rental will hit the market. The house will become another source of income, with a 3.125 percent 30 year mortgage on it.
Longer term, my guess is there will be less available inventory in many of the high priced markets. Between the higher capital gain tax on the sale for a lot of baby boomers that moved up before the basis rollover rules changed and the non-deductibility of new mortgages, don't expect baby boomers in expensive areas to downsize and make way for you young folks to move in. They will be there until the undertaker comes.
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...the ability to roll over basis into a move up home...
Could you briefly explain what this means?
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The IRS rules used to allow you to roll over your cost basis in your house to a new, more expensive house. That allowed you to defer the capital gains tax on your profit on the house you sold and move all your equity to the house you bought. Eventually, the IRS would collect the capital gains tax when you sold your last house in the ladder. Now we have the $250k exemption for singles and $500k exemption for married couples filing jointly instead. We also have the new Obamacare tax of 3.8 percent on net capital gains that applies to singles with an AGI of over $200k and married couples of over $250k. That's AGI, not earned income.
Baby boomers here in Silicon Valley or in places like San Francisco, Westchester County or Northern New Jersey probably bought their first house in the mid-late 1970's or early 1980's and rolled the cost basis into a second or even a third house. The rules changed, and selling the current house, which in some cases is worth 10 times what they paid for their first house, will trigger a large capital gains tax, even after the exemption. Why sell and pay that bill just to downsize?
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For those who live in states with high income tax, it's pretty easy to go over the standard deduction.