Mortgage interest deduction?

[Nate R]

Everyone loves to talk about the deductibility of mortgage interest, and then take their tax rate out of the interest rate. (ie: "My mortgage is 4%, but really only 3% after taxes!")

Am I missing something, or is this wrong UNLESS your mortgage interest paid is completely above and beyond what the standard deduction would be?
Put another way: If I fill out out my taxes and DON'T itemize, a married couple's standard deduction is $11,900. If I itemize, and with my mortgage interest the deductible amount is 12,500, haven't I only saved my marginal tax rate on $600 over what I would've paid if I had no mortgage? And if that's the case, shouldn't we be looking at what we ACTUALLY save on mortgage interest OVER the standard deduction before we start quoting our "after tax" mortgage rates?

[A440]

I agree that people should be aware of how much the mortgage deduction is benefiting them beyond the standard deduction.  Hopefully most people are.  In my situation, my state income taxes will always be over the standard deduction, so I do get the full benefit possible from the mortgage deduction.  If we were making less money or in a low or no income tax state, it would definitely change the way I would look at the mortgage.

[Spork]

Another side of this (that just eats at me when I hear it) is that this is normally used as a reason to buy more house.  It's the idea that you'd be stupid not to buy more given the mortgage deduction.  But that's like paying $1 for a 25 cent coupon.  Yes, you're saving money, but you're spending more money in order to save it.

I'm also not enamored with the idea of the federal government subsidizing folks to encourage buying bigger and better houses.   If you want it to be fair, either allow a "housing deduction" or eliminate it entirely.  For a large portion of the population, buying may not make sense.

[sol]

Yes, mortgage interest is only deductible if you pay more in interest than the standard deduction so it only applies to people who itemize and on only on that portion of your mortgage above a lower middle income house.  Since the interest portion of your payment declines over time, the mortgage interest deduction phases out over time even for people who benefit from it initially.

[Mike]

I understand the point being made about gloating about an interest deduction that may or may not be fully realized by the borrower.  With that said, the borrower should be giddy about the impact on the cost of debt that inflation has since that is far more important than the tax deduction the vast majority of the time*.

Example:
2012 inflation rate (US): 2.1%; so, the real interest rate on any loan would be the loan rate minus 2.1 (thus a 4% mortgage would really be a 1.9% mortgage).

Even the highest marginal rate last year of 35% wouldn't match the impact inflation has on lowering the rate (unless that rate was 6% or greater).

* = high marginal tax rate - and - relatively high interest rate on loan

[Jamesqf]

Am I missing something, or is this wrong UNLESS your mortgage interest paid is completely above and beyond what the standard deduction would be?

I think you may be missing something, because the mortgage interest isn't the only thing that you (or most people, of course it depends on your particular situation) can deduct.  There's real estate taxes, part of your car registration if that's based on a tax, charitable deductions, some employee business expenses, etc.

Say that for you, those things add up to $10K, and your mortgage interest is $10K.  Without the mortgage, you have only the standard deduction; with, you have $8100 more, or about $2800 less tax if you're in the 35% bracket.

[clutchy]

you also have to take into account property taxes, dmv fees, state taxes paid, charitable contributions, medical etc etc.

those are all items that go into the itemized deduction calculation, but yes you're only saving the amount that is in excess of the standard deduction.

The standard deduction is actually pretty generous...

[Spork]

you also have to take into account property taxes, dmv fees, state taxes paid, charitable contributions, medical etc etc.

those are all items that go into the itemized deduction calculation, but yes you're only saving the amount that is in excess of the standard deduction.

The standard deduction is actually pretty generous...

Yeah, I haven't been able to itemize in a long, long time.  I always compute it, but never use it.

I'm not sure 'generous' is the right word here though for  'the amount of my money I get to keep'.  ;)

[mpbaker22]

Everyone loves to talk about the deductibility of mortgage interest, and then take their tax rate out of the interest rate. (ie: "My mortgage is 4%, but really only 3% after taxes!")

Am I missing something, or is this wrong UNLESS your mortgage interest paid is completely above and beyond what the standard deduction would be?
Put another way: If I fill out out my taxes and DON'T itemize, a married couple's standard deduction is $11,900. If I itemize, and with my mortgage interest the deductible amount is 12,500, haven't I only saved my marginal tax rate on $600 over what I would've paid if I had no mortgage? And if that's the case, shouldn't we be looking at what we ACTUALLY save on mortgage interest OVER the standard deduction before we start quoting our "after tax" mortgage rates?

Yes, it depends on their other deductions.  Someone that has $1,000 in student loan interest, $2,000 in charitable contributions, $1,000 in work-related expenses, $2,000 in deductible taxes, and $4,000 in mortgage interest will get the full benefit, but only because they 'missed out' on all the other deductions.  Of course, they likely make the same excuse for all those deductions.

[chicagomeg]

Everyone loves to talk about the deductibility of mortgage interest, and then take their tax rate out of the interest rate. (ie: "My mortgage is 4%, but really only 3% after taxes!")

Am I missing something, or is this wrong UNLESS your mortgage interest paid is completely above and beyond what the standard deduction would be?
Put another way: If I fill out out my taxes and DON'T itemize, a married couple's standard deduction is $11,900. If I itemize, and with my mortgage interest the deductible amount is 12,500, haven't I only saved my marginal tax rate on $600 over what I would've paid if I had no mortgage? And if that's the case, shouldn't we be looking at what we ACTUALLY save on mortgage interest OVER the standard deduction before we start quoting our "after tax" mortgage rates?

Yes, it depends on their other deductions.  Someone that has $1,000 in student loan interest, $2,000 in charitable contributions, $1,000 in work-related expenses, $2,000 in deductible taxes, and $4,000 in mortgage interest will get the full benefit, but only because they 'missed out' on all the other deductions.  Of course, they likely make the same excuse for all those deductions.

Student loan interest is above the line; you don't have to itemize.

[TN_Steve]

[very big SNIP]

Student loan interest is above the line; you don't have to itemize.

Thanks, didn't know that was the case, which made me look at it.  Two caveats.  If you are able to borrow from parents or other relative for something closer to the AFR, there is no deduction ("related parties")--but you still come out ahead because of the lower rates on that loan.  Also, note that the deduction phases out with income increases; given the phaseout range, this is mainly (but not entirely) an issue for professional school loans.

[clutchy]

I'm not sure 'generous' is the right word here though for  'the amount of my money I get to keep'.  ;)

HA :) 

fair enough Spork.

[mpbaker22]

Everyone loves to talk about the deductibility of mortgage interest, and then take their tax rate out of the interest rate. (ie: "My mortgage is 4%, but really only 3% after taxes!")

Am I missing something, or is this wrong UNLESS your mortgage interest paid is completely above and beyond what the standard deduction would be?
Put another way: If I fill out out my taxes and DON'T itemize, a married couple's standard deduction is $11,900. If I itemize, and with my mortgage interest the deductible amount is 12,500, haven't I only saved my marginal tax rate on $600 over what I would've paid if I had no mortgage? And if that's the case, shouldn't we be looking at what we ACTUALLY save on mortgage interest OVER the standard deduction before we start quoting our "after tax" mortgage rates?

Yes, it depends on their other deductions.  Someone that has $1,000 in student loan interest, $2,000 in charitable contributions, $1,000 in work-related expenses, $2,000 in deductible taxes, and $4,000 in mortgage interest will get the full benefit, but only because they 'missed out' on all the other deductions.  Of course, they likely make the same excuse for all those deductions.

Student loan interest is above the line; you don't have to itemize.

Wow, didn't know that.  I hadn't done my taxes yet for 2012, and it was my first out of college.  I'll have to check that out.
Thanks!