I could use some advice from you awesome clever mustachians on our current situation. We are in a very fortunate situation right now financially but would like some advice to try to optimize our tax savings. Here's the low down:
- Just purchased a new home which will have a starting mortgage balance of $500,000. Not very mustachian I know!
- Interest rate is 3.75%. We have a 10/1 ARM, but will have it paid off before the adjustable rate comes into effect.
- Our income is very high right now. In 2016 our AGI was $688,000. This income isn't guaranteed long term though. I run a software business, and currently revenue is good, but there's a real possibility it could decline in future, perhaps significantly.
- Tax brackets are 39.6% fed/9.85% state - married filing jointly.
- Currently have $950,000 in investments, about $150,000 in cash, $120,000 home equity in the new place, and after the sale of our current home goes through will have about $130,000 extra cash. Current networth is about $1.35M.
- Itemized deductions for 2016 were $54,700. This was limited as our AGI was over the $155,650 limit.
Our original plan was going to be to just kill the mortgage in 1 year. We can put the $130,000 + $70,000 cash towards it right away and then pay off the remaining $300,000 in about a year. However, I was listening to a podcast today and it mentioned that the mortgage interest deduction can be beneficial for higher mortgage balances and higher income households. I'm not sure whether this will apply to us as our deductions are limited due to our high AGI, but if it does I'm wondering whether it's a mistake to pay it off so early and maybe pay it off over 10 years instead.
I understand the financial benefits of straight investing vs paying of the mortgage early - I don't really want to get into a discussion about that as it's been discussed endless times before. I'm just trying to figure out whether we'll be missing out on a sizeable tax deduction if we pay off our mortgage early. I tried using a couple of mortgage interest deduction calculators but couldn't really make sense of the results for our situation - especially as our deductions are limited due to the high AGI. I was thinking I could consult with a financial planner or something to see if they could help, but first I'd post here as you guys always seem to be much more knowledgeable than the advisers/CPAs I speak to.
So my question is:
Would our situation allow us to be able to benefit substantially from deducting the mortgage interest - or would it be pretty negligible due to the deduction limit?Any help or advice would be greatly appreciated!