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Monday, October 06, 2008
Myth-The mortgage interest will reduce my tax bill. This is true for the majority of homeowners, but not for all. And this tax break won't work forever. To take tax advantage of your home loan's interest, you must itemize and come up with a total that exceeds your standard amount. On 2006 tax returns, the standard deductions will be $5,150 for single taxpayers, $7,550 for head-of-household filers and $10,300 for married couples who file jointly. These amounts increase a bit each year to account for inflation.
For the typical American taxpayer who pays in the 28% tax bracket, the deduction amounts to a rebate of twenty eight cents for every dollar paid in interest. Complicating matters is the fact that this is only true for that portion of the interest that exceeds the standard deduction allowed for every taxpayer that files. That deduction, currently $10,000 per married couple, is usually greater than the amount of mortgage interest most couples pay during the year. What this means is that many, if not most, Americans derive no tax benefit from their mortgage interest whatsoever.
Of course, homeowners who pay more than 28% of their income in taxes or those who own homes with large mortgages can benefit more from the tax deduction. Most American homeowners, on the other hand, get nothing from it. The tax deduction isn't entirely insignificant, but it shouldn't be a deciding factor in determining how to pay for a home. Prospective buyers should realize that while the deduction is a potential perk of taking out a mortgage, the likely tax benefit from it ranges from very small to nothing at all.
For the typical American taxpayer who pays in the 28% tax bracket, the deduction amounts to a rebate of twenty eight cents for every dollar paid in interest. Complicating matters is the fact that this is only true for that portion of the interest that exceeds the standard deduction allowed for every taxpayer that files. That deduction, currently $10,000 per married couple, is usually greater than the amount of mortgage interest most couples pay during the year. What this means is that many, if not most, Americans derive no tax benefit from their mortgage interest whatsoever.
Of course, homeowners who pay more than 28% of their income in taxes or those who own homes with large mortgages can benefit more from the tax deduction. Most American homeowners, on the other hand, get nothing from it. The tax deduction isn't entirely insignificant, but it shouldn't be a deciding factor in determining how to pay for a home. Prospective buyers should realize that while the deduction is a potential perk of taking out a mortgage, the likely tax benefit from it ranges from very small to nothing at all.
More Mortgage Resources
How to maximize your Tax Deductibles?What is Mortgage Tax deduction?
Mortgage's Tax Implications
What are the tax benefits associated with different types of Loans?
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Current Mortgage Rates*
Loan Type National Average |
|
| 30-yr. fixed | 6.25% |
| 30-yr. fixed jumbo | 7.62% |
| 15-yr. fixed | 5.88% |
| 15-yr. fixed jumbo | 7.12% |
| 7/1 ARM | 6.62% |
| 5/1 ARM | 6.25% |
| 3/1 ARM | 6.00% |
| 1-yr. ARM | 5.50% |
| 1-yr. LIBOR ARM | 6.25% |
| 10/1 ARM | 8.38% |
| 40-yr. fixed | 6.88% |
*Mortgage Rates Updated: 10/03/2008