Hello Sophisticated Spenders!
Imagine sharing your goal of paying off your mortgage early and some moron telling you not to do it because you’ll lose the mortgage interest deduction.
They totally miss the fact that you won’t have to throw any money away on interest anymore so that’s actually a good thing!
This is the second article of a series by Steve Stewart as he and his wife are about to pay off their house!
I love their story!
On December 14th, 2015 my wife and I will pay off our house early. This means we will lose our home mortgage interest deduction – and we couldn’t be happier!
That sounds crazy to many, almost absurd. I am here to tell you – the mortgage interest deduction is not a good reason to keep a mortgage.
Let’s start from the beginning: Why do you want a house?
- A place to call your own
- More room for raising children
- To grow equity and an inflation hedge investment
Then there is the mortgage interest deduction. The interest you pay for your mortgage can reduce your taxable income. This is a great benefit for homeowners, but it’s not as great as most people make it sound.
Last year I ran our taxes two ways: One where we included the interest in our itemized deductions and one without.
[tweetthis]What cost us $1,150 in interest saved us $110 in income taxes.[/tweetthis]
Does that sound like a good trade to you? Yeah. It’s actually worse than that.
The advantage of a mortgage interest deduction only comes into play for someone who pays more expenses than what you are already given as a standard deduction.
What’s the Standard Deduction? In 2014 the standard deduction for a married couple filing a joint tax return was $12,400. That means you had to spend at least $12,401 in itemized deductions to beat the standard deduction.
Items that are used to calculate an itemized deduction are:
- Real estate taxes
- Property taxes
- Cash donations to qualified charities (churches, Salvation Army, etc)
- Non-cash donations to qualified charities (like Goodwill, etc)
- Unreimbursed work-related expenses
- Large medical expenses in relation to your income
Our Itemized Deductions from 2014 were:
- $2,458 in real estate taxes
- $137 in personal property taxes
- Gave $10,790 to our church (part of a capital campaign)
- Donated $519 in used clothing and household items
- Got to write off $4,867 in state taxes and local taxes
- $1,150 in mortgage interest
In total, we spent $19,921 in expenses and reduced our taxable income by that amount. If we were in a 20% tax bracket, this would reduce our income tax by $3,984.
However, if we didn’t have the expenses noted above we would still have been able to reduce our taxable income by the standard deduction, $12,400. The standard deduction would save us $2,480 in taxes.
What was the net difference between itemizing and not itemizing? $1,504.
Let me drive that home one more time: We spend $19,921 so we could save $1,504 on our income taxes.
Look, I’m not trying to discourage you from itemizing your income taxes. What I am saying is you should not want to keep a mortgage just for a tax deduction.
Take the deduction if you can but, more importantly, pay off the house if you can.
What could you do if you didn’t have to pay for the roof over your head (metaphorically speaking)?
Is it smart to pay no rent, no mortgage, and have no deduction? YES.
Paying off the mortgage means we aren’t paying interest any more. We will own our shelter with only real estate taxes, homeowner’s insurance, and household maintenance costs to worry about.
We are paying off our house early and losing the mortgage interest deduction – and I couldn’t be more excited!
I want to challenge you to think outside the Financial-Mantra box: What could you do today that would move you closer to losing your home mortgage interest deduction?
Steve Stewart has been teaching and encouraging others how to eliminate debt and build wealth for almost a decade. This year he left his day job, used cash to buy a car and new windows for his house, and is paying off the house as a Christmas gift to his wife. You can find out more about Steve, his blog, podcast, the other articles in the “Paying Off The House Early” series at http://www.SteveStewart.me/paidoffhouse