Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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I am debating whether or not to pay off my mortgage which has a rate of 2.875% with 11 years left on a fifteen-year. I am in the 28% federal/8.25% state tax bracket. Every year, I have been hit with the AMT. This is due to high property taxes, high state income taxes, and two dependents. If I have no mortgage interest to deduct, could that move me out of the AMT range? I have read articles about the AMT and understand why I am in the AMT range (high property and state income taxes and dependents), but not sure how mortgage interest comes into play. I don't have incentive stock options or anything like that.
Mortgage interest is not an exclusion for AMT, so it is a deduction for both calculations - regular tax and AMT. The only way having a mortgage interest deduction would help is if it was quite large and you had a sizable difference between your incremental AMT rate and your incremental regular tax rate. Let's say that you are in the 28% regular bracket, but in the AMT phase out zone and paying an incremental rate of 35% for AMT. Today you are paying $700 in AMT penalty. If you had a $10,000 mortgage interest deduction, you would reduce your AMT tax by $3500 and you would reduce your regular tax by $2800. At that point, you are not paying a penalty for being in AMT.
Thanks. So if I'm in the 28% tax bracket under the regular system and also in the 28% tax bracket for the AMT, then I still get the same amount of deduction either way?