Myth... Not all mortgage interest is tax deductible!

[jh]

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[jh]

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[markh]

On Approach:

Yeah, CA sucks!!

mark

[mptfan]

bump for the newcomers.

[mptfan]

This issue keeps coming up, so I thought I would bump this thread.

[dkturner]

This issue keeps coming up, so I thought I would bump this thread.

In the same vein you can get credit for making charitable contributions without actually having to write any checks.

[FinancialDave]

And let's just remember this lesson is not about mortgage interest, it is about the fact that the benefit you think you get from ANY itemized deduction is very non-linear.

To update the numbers for 2012:

Standard deduction $5,950 single, $11,900 married.

Some of the previous posts would indicate that say in 2012 I had $11,900 of charitable deductions and $11,900 of mortgage interest. Neglecting other misc deductions, I could figure my mortgage interest is totally deductible and calculate my benefit appropriately --- of course that would make my charitable deduction useless in my benefit calculation.

What keeps you from looking at this in a more realistic manner and say I got $5950 benefit from both the charitable deduction and the interest deduction? In other words you split up your total itemized deduction into what I call the real benefit which is calculated as [total itemized - standard deduction] and then divide this number up by the total itemized # to create a % benefit to apply to each deduction.


fd

[Joe S.]

My itemized deductions for taxes is > than the standard deduction.

So, my interest is 100% deductible.

Your interest is only 100% deductible if your itemized deductions, excluding mortgage interest, is greater than the standard deduction.

That is what I said. The taxes I itemize, e.g. real estate, income, etc. are by themselves above the standard deduction. So, again, my interest is 100% deductible.

Your original post was unclear. When you said "my itemized deductions for taxes is > than the standard deduction," I originally interpreted it to mean "my itemized deductions for when I do federal taxes is > than the standard deduction."

[markcoop]

I don't know if I'm lucky or not. I live in NY and between my property taxes and state income taxes, I'm already over the standard deduction. Therefore, 100% of my mortgage interest is deductible.

[HoosierJim]

The realtors have long advocated for legislation and stressed the mortgage interested deductibility during the sales process. If and when the law changes, just wait to see how long it takes for them to start an "education" initiative that to show that most people don't itemized and thus get no benefit. Many that do only get marginal benefits. If changes are made to charitable and state income tax deductibility, then very few will itemize and high tax states will continue to have an exodus.

[FinancialDave]

I don't know if I'm lucky or not. I live in NY and between my property taxes and state income taxes, I'm already over the standard deduction. Therefore, 100% of my mortgage interest is deductible.

That may be true, but just remember that the first 100% of your itemized deductions that equal your standard deduction are NOT deductible under your logic.

fd

[livesoft]

I don't know if I'm lucky or not. I live in NY and between my property taxes and state income taxes, I'm already over the standard deduction. Therefore, 100% of my mortgage interest is deductible.

Yep, when we lived in NY, we didn't even have a mortgage nor property taxes and we itemized since the NY state income taxes alone put us above the standard deduction.

[happymob]

I've itemized once (due to a high state income tax year). We are going to itemize for a second time this year (due to doubling up property tax payments and charitable contributions into the same year, etc). This is over a 10 year period.

I think I get how for a lot of the country itemizing is routine. For the much of the midwest, itemizing is hard work. We earn 2.5 times the median household income (nationally), pay roughly 5% in state income taxes, and still can't itemize (with a mortgage, we probably could every year, but as the OP posted, some of the mortgage interest would be eaten up simply bringing us up to the standard deduction threshold). I suppose if we paid more in state taxes, or had significantly higher property taxes (looking at you New Jersey), all mortgage interest would be tax deductible. But for a large part of the country, this is a benefit to only those who already earn a lot of money and buy too much house.

[grabiner]

And let's just remember this lesson is not about mortgage interest, it is about the fact that the benefit you think you get from ANY itemized deduction is very non-linear.

To update the numbers for 2012:

Standard deduction $5,950 single, $11,900 married.

Some of the previous posts would indicate that say in 2012 I had $11,900 of charitable deductions and $11,900 of mortgage interest. Neglecting other misc deductions, I could figure my mortgage interest is totally deductible and calculate my benefit appropriately --- of course that would make my charitable deduction useless in my benefit calculation.

And that is how I would calculate it for the purpose of your marginal benefit. If you pay down your 4% mortgage by $25,000, you lose $1000 of itemized deductions, so the net benefit is only $750 in a 25% tax bracket, a 3% return. This is the return you would use in deciding whether to pay down the mortgage or invest the money.

[555]

My itemized deductions for taxes is > than the standard deduction.

So, my interest is 100% deductible.

Your interest is only 100% deductible if your itemized deductions, excluding mortgage interest, is greater than the standard deduction.

That is what I said. The taxes I itemize, e.g. real estate, income, etc. are by themselves above the standard deduction. So, again, my interest is 100% deductible.

Your original post was unclear. When you said "my itemized deductions for taxes is > than the standard deduction," I originally interpreted it to mean "my itemized deductions for when I do federal taxes is > than the standard deduction."

That post is about four years old and that poster hasn't visited this forum for fifteen months.

[interplanetjanet]

I suppose if we paid more in state taxes, or had significantly higher property taxes (looking at you New Jersey), all mortgage interest would be tax deductible. But for a large part of the country, this is a benefit to only those who already earn a lot of money and buy too much house.

Look on the bright side - I probably earn a bit more but nothing compared to some here, and even without a house I've smacked into AMT for years just from having children, filing Head of Household (this is effectively an AMT preference item vs filing Single) and paying state taxes. On the bright side, if I got a mortgage the interest would be deductible from the first dollar...but that's not really that bright of a side. :-/

[Bob's not my name]

• When we talk about itemized deductions of any type we are addressing a minority. Families below median don't pay income taxes.
• I have no mortgage and no property tax. In many states the income tax is high and flat. State taxes alone put me over the standard deduction (same as livesoft's point).
• Under current law the standard deduction for married couples will go down next year, returning to the marriage penalty level of 167% of the single filer standard deduction.
• Under current law the phaseout of itemized deductions will return next year.
• Elimination of the mortgage interest deduction might increase a wealthy family's tax burden by about 1% of their gross income, an upper middle class family's taxes by about 3% of their gross income, and an east coast or California middle class family's taxes by about 2% of their gross income. Since I don't have a mortgage and since I have a basic understanding of how government encouragements inflate the housing market anyway, I'm cool with all that, but I'm not going to pretend that the mortgage interest deduction is a negligible consideration.

[markcoop]

I don't know if I'm lucky or not. I live in NY and between my property taxes and state income taxes, I'm already over the standard deduction. Therefore, 100% of my mortgage interest is deductible.

That may be true, but just remember that the first 100% of your itemized deductions that equal your standard deduction are NOT deductible under your logic.

fd

I'm not sure I get your point. Since I'm paying the property tax and state income tax regardless, I will always itemize (as long as I live here). I think any decision about using mortgage or HELOC should view the interest as fully tax deductible. I don't think I care about how I view the first 100% of my itemized deductions that equal my standard deduction since I will never use the standard deduction.

[grabiner]

I don't know if I'm lucky or not. I live in NY and between my property taxes and state income taxes, I'm already over the standard deduction. Therefore, 100% of my mortgage interest is deductible.

That may be true, but just remember that the first 100% of your itemized deductions that equal your standard deduction are NOT deductible under your logic.

That's true, but those are going to be paid anyway, so they are irrelevant to his financial decisions such as paying down a mortgage or contributing appreciated stock to charity.

[RenoJay]

What a wonderful initial post! Thanks for pointing this out.

[NorCalDad]

It's a fair point, especially for people who are deep into their mortgage payoff and live in low-tax states.

In a state like California, where we have high income taxes, the average Boglehead may approach the standard deduction level through the state income tax and property tax deductions. I know that's the case for us.

[JW Nearly Retired]

It's a fair point, especially for people who are deep into their mortgage payoff and live in low-tax states.

In a state like California, where we have high income taxes, the average Boglehead may approach the standard deduction level through the state income tax and property tax deductions. I know that's the case for us.

In CA, around here, most who bought their house this century exceed the MFJ std deduction from property tax alone.

But you can't beat the weather.
JW

[cherijoh]

My itemized deductions for taxes is > than the standard deduction.

So, my interest is 100% deductible.

Your interest is only 100% deductible if your itemized deductions, excluding mortgage interest, is greater than the standard deduction.

I think you missed Paulob's point - he is saying that his itemized deduction for taxes ALONE exceeds the standard deduction - therefore his mortgage interest IS 100% deductible.

C

[Tom_T]

My itemized deductions for taxes is > than the standard deduction.

So, my interest is 100% deductible.

Your interest is only 100% deductible if your itemized deductions, excluding mortgage interest, is greater than the standard deduction.

I think you missed Paulob's point - he is saying that his itemized deduction for taxes ALONE exceeds the standard deduction - therefore his mortgage interest IS 100% deductible.

Not really. It depends on how you look at it.

Let's say the standard deduction is $15,000, and your mortgage interest is $20,000. Is it 100% deductible? On your tax form, of course, since you are obviously deducting it.

But, you could have gotten a $15K standard deduction no matter what. Therefore, having $20K in mortgage interest has given you just an additional $5K in deductions. So, if you're asking "how does this mortgage benefit me", the answer is "I get an additional $5K in deductions." Not $20K.

Granted, most of us itemize more than mortgage interest. Using my example, if I also have $5K in property taxes, $2K in contributions, and $5K in state taxes, my total itemized amount is $32K, or $17K more than the standard deduction. I know I always forget about the standard deduction because I haven't used it in ages, but mentally I really need to subtract it from my itemized deductions to know just what additional benefit I'm getting.

[FinancialDave]

Expanding a little on what Tom_T said above.

It also seems like a very "myopic" point to only consider the "marginal" affect of the interest on your deductions, much like it would be to consider that all your income is taxed at 25% just because your marginal rate is 25%.

For simplicity let's consider the single New Yorker with $5950 in deductible state income tax in 2012 and $5950 of deductible mortgage interest - great in 2012 he saves some taxes.

Now in 2013 Congress because they don't want to upset the "bankers union" decides instead of doing away with the mortgage deduction, they will do away with the state income tax deduction, how valuable a deduction is the mortgage interest now (not so much.)

Or to look at it another way -- in 2012 how much of a deduction did you get off the amount of your state income tax - NONE - even though someone told you state income tax was deductible!

I think if you want to decide the worth of your deductions they need to be considered on a Pro-rated basis, otherwise when new tax laws come out you won't know the value of one deduction over the next.

Certainly, once you know you are over the standard deduction amount you can figure the value of each "marginal" dollar on any of the deductions, but it is being a little unjust to the analysis to think that all of the mortgage interest is deductible. A better way to think about it is "because of the total amount of itemized deductions I got "x" dollars of additional deductions off my income.

fd

[Default User BR]

I think you missed Paulob's point - he is saying that his itemized deduction for taxes ALONE exceeds the standard deduction - therefore his mortgage interest IS 100% deductible.

Not really. It depends on how you look at it.

No, it doesn't. The state income tax and property tax are not optional. Those have to be paid and are deductible. So the only variable is the mortgage interest. If you have already filled the standard deduction amount with the first two, then the mortgage interest gives an additional 20k of deductions. If you prefer to invert the math, then the mortgage deduction fills up 15k of standard deduction and makes the state income tax and property tax 100% deductible. Either way you end up with an additional 20k of deductions.

It's only when you don't fill up the standard deduction with non-optional deductions that there's a question.


Brian

[porcupine]

You guys might be interested in (re)visiting this poll and the associated discussion.

- Porcupine

[tfb]

I'm late to the discussion. Actually ALL mortgage interest is tax deductible even if you use the standard deduction. Standard deduction gives you some extra deduction on top of your mortgage interest. The extra deduction amount is variable; it can go to zero if your deductions are already high. People without a mortgage also get a bonus deduction but it doesn't mean you are not getting the tax deduction for your mortgage interest. You get it all the time, plus an extra bonus deduction if you use the standard deduction.

[NorCalDad]

I think if you want to decide the worth of your deductions they need to be considered on a Pro-rated basis, otherwise when new tax laws come out you won't know the value of one deduction over the next.

It seems to me you'd get a fairly clean valuation of your mortgage interest/property tax deduction by calculating the alternative tax situation in which you are not a homeowner. Or by calculating the alternative tax situation in which mortgage interest is not deductible.

[Tom_T]

I'm late to the discussion. Actually ALL mortgage interest is tax deductible even if you use the standard deduction. Standard deduction gives you some extra deduction on top of your mortgage interest. The extra deduction amount is variable; it can go to zero if your deductions are already high. People without a mortgage also get a bonus deduction but it doesn't mean you are not getting the tax deduction for your mortgage interest. You get it all the time, plus an extra bonus deduction if you use the standard deduction.

That makes no sense. The fact that the standard deduction may be higher than the mortgage interest doesn't mean that the standard deduction includes the interest! If you didn't have a mortgage at all, you'd still get the standard deduction. Spending $15K on mortgage interest therefore gets you no additional tax benefit.

[tfb]

The fact that the standard deduction may be higher than the mortgage interest doesn't mean that the standard deduction includes the interest!

Why not? Everybody is free to itemize. You choose to use standard deduction only when it gives you a bonus. If you choose to itemize, you get your deduction for the interest. You only give up your bonus.

[sscritic]

In support of tfb:

Schedule A, line 30

If you elect to itemize deductions even though they are less than your standard deduction, check here . .

If you couldn't choose to itemize when your itemized is less than your standard, why do they put the box right on the form?

I could tell you why, but perhaps you can read another running thread for a hint.

[Tom_T]

The fact that the standard deduction may be higher than the mortgage interest doesn't mean that the standard deduction includes the interest!

Why not? Everybody is free to itemize. You choose to use standard deduction only when it gives you a bonus. If you choose to itemize, you get your deduction for the interest. You only give up your bonus.

Well, let's put it another way. Let's say you are a renter. You normally take the standard deduction.

You decide to buy a house. You spend $x/year on mortgage interest. It's not enough to itemize, so you continue to take the standard deduction. The additional money you are now spending on interest doesn't give you a dime's worth of tax benefit. Are you going to tell me that you consider your interest, your new extra expense, to be deductible?

[tfb]

Well, let's put it another way. Let's say you are a renter. You normally take the standard deduction.

You decide to buy a house. You spend $x/year on mortgage interest. It's not enough to itemize, so you continue to take the standard deduction. The additional money you are now spending on interest doesn't give you a dime's worth of tax benefit. Are you going to tell me that you consider your interest, your new extra expense, to be deductible?

Yes, but you also lose some bonus you previously got. Getting a deduction and losing some bonus are two separate things, even if they net out to zero.

[555]

LOL, this is pure sophistry:

"I'm late to the discussion. Actually ALL mortgage interest is tax deductible even if you use the standard deduction. Standard deduction gives you some extra deduction on top of your mortgage interest. The extra deduction amount is variable; it can go to zero if your deductions are already high. People without a mortgage also get a bonus deduction but it doesn't mean you are not getting the tax deduction for your mortgage interest. You get it all the time, plus an extra bonus deduction if you use the standard deduction."

[TheGreyingDuke]

LOL, this is pure sophistry:

"I'm late to the discussion. Actually ALL mortgage interest is tax deductible even if you use the standard deduction. Standard deduction gives you some extra deduction on top of your mortgage interest. The extra deduction amount is variable; it can go to zero if your deductions are already high. People without a mortgage also get a bonus deduction but it doesn't mean you are not getting the tax deduction for your mortgage interest. You get it all the time, plus an extra bonus deduction if you use the standard deduction."

[porcupine]

LOL, this is pure sophistry:

"I'm late to the discussion. Actually ALL mortgage interest is tax deductible even if you use the standard deduction. Standard deduction gives you some extra deduction on top of your mortgage interest. The extra deduction amount is variable; it can go to zero if your deductions are already high. People without a mortgage also get a bonus deduction but it doesn't mean you are not getting the tax deduction for your mortgage interest. You get it all the time, plus an extra bonus deduction if you use the standard deduction."

tfb's logic takes the cake.

So, even when I am taking the standard deduction, I would expect the IRS to audit the charitable contributions I could have claimed. If I respond saying that I am not even listing any charitable contribution, the IRS will then come back with "The heck you are! All you did was reduce the bonus extra deduction you are getting! Show us the documentation!"

- Porcupine

[sscritic]

Let A = B + (A - B) where A - B is positive.

If I tell you I paid A, did I also pay B?
If I tell you I deducted A, did I also deduct B?

Are your two answers the same? If not, why not?

I am assuming you have recognized A and B by this point.

[porcupine]

In support of tfb:

Schedule A, line 30

If you elect to itemize deductions even though they are less than your standard deduction, check here . .

If you couldn't choose to itemize when your itemized is less than your standard, why do they put the box right on the form?

I could tell you why, but perhaps you can read another running thread for a hint.

I am still trying to answer your other question!!

But this merits a response as well.

OK, there is a choice to itemize when itemized is less than standard. And here is the meaning it conveys to me:

- the taxpayer can choose to itemize, in which case the itemized deduction (B) will be used (even if less than standard), or
- the taxpayer could choose the standard deduction (A).

From the above logic, the selection of the standard deduction (A) implies that the mortgage interest was not used, and there was no question of a bonus B (where A - B is positive). Had the mortgage interest been used, that is all that the taxpayer could've claimed as the itemized cost.

- Porcupine

PS: Please note that this is simplistic logic, in that other deductions (property tax, state income tax, etc) have been excluded for the sake of simplicity.

[sscritic]

Since someone actually thought about the issue (thanks porcupine), I will tell you that the other thread is about whether you can itemize on your state return if you take the standard deduction on your federal return. Some people will save more on their state return by itemizing than they lose by not taking the standard deduction on their federal, thus the box is there for those states that require you to do on your state what you do on your federal.

Because of different levels of standard deduction (as well as different rules for what is deductible), fed to state, you can have situations where you give up the federal bonus so you can take the additional itemized deductions on your state return. (I guess I just repeated myself.)

Note that if you do itemize on either return, you can never tell which items are itemized that are above the standard deduction. The items that are itemized above the standard deduction are your bonus itemized items, if you will, but you never can identify them. (And now for the third time) some people give up the federal bonus to get the state bonus.

[porcupine]

Since someone actually thought about the issue (thanks porcupine), I will tell you that the other thread is about whether you can itemize on your state return if you take the standard deduction on your federal return. Some people will save more on their state return by itemizing than they lose by not taking the standard deduction on their federal, thus the box is there for those states that require you to do on your state what you do on your federal.

Because of different levels of standard deduction (as well as different rules for what is deductible), fed to state, you can have situations where you give up the federal bonus so you can take the additional itemized deductions on your state return. (I guess I just repeated myself.)

Note that if you do itemize on either return, you can never tell which items are itemized that are above the standard deduction. The items that are itemized above the standard deduction are your bonus itemized items, if you will, but you never can identify them. (And now for the third time) some people give up the federal bonus to get the state bonus.

sscritic:

I never realized that some good can come out of itemizing on the Federal return, even if it means giving up the claim/right to a standard deduction. It figures, based on my smartalec response on that other thread (earlier, I failed to realize which one you were referring to).

- Porcupine

PS: All said and done, I still disagree with tfb's logic, though!