Wednesday, November 10, 2010

The Mortgage Tax Deduction Myth

I am so tired of hearing about how mortgages are "Good Debt". I have a few articles I wanted to point my readers toward in case anyone was interested in hearing the other argument, that the amount of interest paid to the lender far outweighs the tax deduction the borrower receives from the government.

The Simple Dollar

-Most people don't take deductions anyway! They use the standard deduction. He claims 70% of people use the 1040A to file.

This is on Yahoo

Also, let's explore the differences between a tax deduction and a tax credit. A tax deduction just reduces your tax liability. The TurboTax Blog (I have used Turbo Tax for 6 years to do our taxes myself and NO they are not paying me to say that!) specifices that "a tax credit is something that directly reduces the amount of taxes you owe".

So here's the deal. If you are in the 25% tax bracket and paid $100 of interest on your mortgage (remember, you can only deduct the money you paid in interest, NOT the full mortgage payment) then you can deduct $25 from your adjusted gross income (aka your taxable income). And remember, that's if you aren't part of the 70% of taxpayers who take the standard deduction. So you'll end up saving $6.25 (which is 25% of $25) on your taxes.

So here's the deal. I know most of us want a house. That means we likely need a mortgage. But I don't like when people call it "good debt" just because we have our taxes reduced by a tiny amount to keep paying money to a bank.

I'd rather put down a more substantial down payment so I can own more of my house and throw less of my money toward the bank for interest. This is the opposite of what our financial planner suggests we do. She uses the 'good debt' argument.

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