Why is my mortgage interest not tax deductible
Your Mortgage Interest Deduction is Worthless (Probably)
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what's up guys jake here welcome back to
the channel in today's video
we're going to talk about the home
mortgage deduction and potentially why
it's not that beneficial to you i've
already made a couple videos about home
ownership if you want to check them out
this one's about the difference between
a 15
and a 30 year fixed rate mortgage which
one's better for you
and this video is an alternative method
to help you pay off your house
the fastest i'll link those down below
if you want to check them out
and paying off your home is really
important especially for people in the
fire community financially independent
retire early
having that mortgage can feel too risky
when you want to retire early
additionally if you're trying to
retire traditionally you know at the age
of 60 65 whatever
once again paying off your house not
having that mortgage payment every month
is super important however you will be
told things you will hear things from
people
along these lines don't pay off your
house you will lose the tax deduction
or keeping your mortgage is a great tax
write-off
this is baloney this this really isn't
true at all and i'm going to demonstrate
why in this video
first thing you need to know is that
when you do your taxes turbo tax or h
r block they're going to ask you a bunch
of annoying questions
the reason why is they're trying to
determine which is better for you
itemizing your deductions or taking the
standard deduction
however for most people you know when
you're answering all these questions
it's a waste of time
the reason why is because 90 of
americans
take the standard deduction they don't
have enough
itemized deductions to overcome the
standard deduction
and you don't get both it's not you get
the standard and then you get to
tack on any additional deductions it's
one or the other you only get one
the most common itemized deductions are
charitable contributions
medical expenses home mortgage interest
payments
and state and local taxes however
especially since 2017
the standard deduction was raised it was
raised to
25 100 for a married couple
it's 12 550 if you're single
and since it was raised which is great
because more people are getting a tax
savings but because the standard
deduction is so high now
like i said less than 10 percent of
people actually
have enough itemized deductions to claim
a larger itemized deduction amount
so we're going to do some examples and
i'll explain to you exactly why this is
but first if you're not familiar with
marginal tax brackets
we're going to do an example of a
married couple filing jointly but let's
just think about
how do marginal tax brackets work and
we'll do a single person first as an
example
so your raw income your total salary for
the year you get to claim
a deduction either the standard or
you're itemized
what is remaining is your taxable income
and for a single person
they pay ten percent to the federal
government's on the income between
zero and 9875
they then pay 12 percent on additional
money between 9
000 and 40 000 they then only pay 22
percent
on the income between 40 and 85. 20
they pay 24 just on the income between
85 and 163
so forth and so forth this is a
progressive tax system
now for a single person when you
when you uh let's assume they're they
have a hundred thousand dollars worth of
taxable income so this is after their
deductions
when you do the math they're paying
about eighteen thousand dollars in
federal taxes
so eighteen percent just on their
taxable income
and i'm making an assumption in this
video that most people buying a home are
a married couple
let's do an example of a married couple
with a household income
of one hundred thousand dollars now the
the tax brackets work the same
ten percent twelve percent twenty two
twenty four but the
numbers get doubled almost because
there's two people in the household
so a married couple is only paying
between
uh there's only gonna pay ten percent on
their income
combined between zero and nineteen
thousand dollars
and they're paying twelve percent on
their income between nineteen and eighty
so forth and so forth so when you
actually do the math
uh of a married couple whose uh total
income is a hundred thousand dollars if
they take the standard deduction of
twenty five thousand one hundred
their taxable income is seventy four
thousand nine hundred
meaning they never even reach the 22
percent tax bracket they don't reach the
24 or the 32
so their federal taxes if you know
completely simplifying it
is 8593 so 11.4 percent of their taxable
income
but only 8.6 of their total household
income
so i've told you that 90 of americans
take the standard deduction
for married couples filing jointly so
when you hear people say
don't pay off your house you will lose
the tax deduction
or keeping your mortgage as a great tax
write-off these people are probably
taking the standard deduction and they
don't understand that they're not
getting
any tax savings this year if they
actually were
itemizing if they understood their own
taxes
then they would know they were itemizing
and they had other things
like charitable contributions or medical
expenses
that was causing them to overcome their
standard deduction
and the confusion i think the reason why
people have this misconception about the
home mortgage
deduction is because people don't
understand the difference between a
tax deduction and a tax credit
tax deductions lower your taxable income
tax credits just save you on taxes so
what is an example of a tax
credit well if you had a child or
dependent in your
in your household then you just pay less
in taxes
tax credits don't reduce uh the
calculation
for your income they just save you on
your raw tax bill
so let's do an example with numbers to
demonstrate why the home mortgage
deduction
really isn't that good and you can find
these
amortization schedule calculators on the
internet
let's assume that you bought a house or
you have a house with a remaining
mortgage
of three hundred thousand dollars and
you got a really good rate
3.5 percent apr now you're paying about
875 dollars in interest per month
now that amount you're paying in
interest goes down every month according
to the schedule the amount going to
principal
increases every month the amount going
to interest to the bank
goes down every month but let's just go
ahead and fix it at 8.75
multiply it by 12. you're only paying
ten thousand five hundred dollars
in mortgage interest that year yes
that's a lot of money
however for a married couple your
standard deduction is twenty five
thousand one hundred dollars you didn't
even come close you didn't even come
to fifty percent uh of what you needed
to
have more itemized deductions than the
standard deduction for a married couple
so if if you're filing jointly and you
have a mortgage
uh remaining of 300 000 or less
you don't even come close to overcoming
the standard deductions you're gonna
need
charitable contributions or medical debt
or or other itemized deductions
before this is relevant or useful to you
at all
but let's pretend like it was useful for
you let's pretend like the standard
deduction for a married couple was lower
would it still make sense to keep your
mortgage payment
for the tax deduction and this is once
again confusing to people
but it doesn't make sense to keep a a a
payment
to save on on taxes so let's pretend
you could pay off your mortgage but you
didn't want to because you wanted to
keep the standard you wanted to keep the
tax deduction
well if for every hundred dollars you're
paying to your mortgage lender
you're getting back from the government
twelve dollars in tax
savings if you were using the home
mortgage deduction
it doesn't make sense if you don't have
to pay this hundred dollars
then you just save a hundred dollars
paying a hundred dollars to get
twelve dollars back when you're in this
twelve percent marginal tax bracket
that's that's not a good reason to keep
your mortgage uh
if you are capable of paying it off the
same is true for a single person let's
pretend that you're
single and you bought a really expensive
house now yes
if you can't pay it off and the home
mortgage deduction
overtakes the standard deduction you can
claim as a single person
then yeah it's it's nice you had to pay
a hundred and you got 24 back in tax
savings
however once again if you have the
savings if you have the money
and you can pay off your mortgage you
should because then you just
save one hundred dollars you know the
taxes are irrelevant
the point i'm trying to make in this
video is that it never makes sense to
keep a liability
just to keep a tax deduction uh tax
deductions are supposed to reduce the
hurt reduce the pain
on a burden that you're experiencing
such as medical debt
or it's to incentivize you with
charitable contributions
however if you just didn't make
charitable contributions
then you save that money you know once
again paying a hundred dollars or
donating a hundred dollars to get 24
back
that's not a good deal for you uh it's a
small incentive on something you were
going to do anyways
so if you can't pay off your home and
you have to pay all this interest
and it somehow overtakes the standard
deduction for a single
person then that's nice but once again
don't keep liabilities just to keep tax
deductions the math doesn't add up
and something that people say about the
home mortgage deduction is that it only
benefits rich people
people who buy really expensive houses
and i don't really think this is true
either
so the max you can claim for the home
mortgage deduction right now is
a house with a 750 000 mortgage
so let's say you got a you know a 750
000 home at 3.5 percent
so you're paying 2100 in interest a
month or about
26 thousand dollars a year so if you're
married
you just barely by by by less than a
thousand dollars
overcame the standard deduction for a
married couple
so it's it's better by like 900 but once
again
even if you're rich it doesn't make
sense to not pay off your home to get
the tax
deduction because if you can pay it off
you know
why even if you're in this top top tax
bracket let's say you're a super high
end
income earner with a 750 000 home it
doesn't make sense to pay 100 to get 32
back when you don't have to pay the 100.
and there you have it guys i hope i
cleared up any confusion with the home
mortgage deduction once again virtually
nobody benefits from this deduction
however
lots of people lots of homeowners it
makes them feel good to say hey
i'm getting a tax write-off or i'm
getting a tax deduction
when those people don't actually
understand how their taxes work and
they're not really benefiting at all
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video
take care