Is home mortgage interest that valuable of a tax deduction?

The value of the home mortgage interest deduction cannot be understood unless you understand the standard deduction and Schedule A of the 1040. Every person filing taxes is afforded a standard deduction based on filing status. The standard deduction is an amount issued annually by the IRS. The taxpayer decides whether to take the standard deduction or itemize deductions depending on which is most advantageous to the tax payer. The schedule A is the form we compute the total of itemized deductions. Mortgage interest is included as a line item on Schedule A. Other items on the schedule A are the charitable deduction, unreimbursed employee expenses, and healthcare costs to name a few.

The value of itemized deductions, which mortgage interest is a part of, is only the amount it exceeds the standard deduction. For 2017 the standard deduction for a person filing “Married filing Jointly” will be $12,700. So if your itemized deductions equal $12,700 there is no advantage, but if your total itemized deductions equal $12,800 you will have saved an additional $100 on your taxes…. that would be wrong. That additional $100 in itemized deductions would have saved you a lesser amount, likely around $25 depending on your tax bracket.

So probably the best way to illustrate this is with an example;

• I would consider a home for $250,000 about average. A mortgage for this amount would cost about $9,300 in interest the first year.
• A pretty average real estate tax would be about $2,000 for that home, so all told we would have about $12,500 of deductible interest and real estate taxes.
• We would still need to find an additional $200 in deductions to make itemizing worthwhile over the standard deduction.

The key thing is that the IRS gives every person the ability to use their standard deduction. This means that whether or not you buy a home and take advantage of the mortgage interest deduction you get a comparable amount in the standard deduction. The ability to deduct mortgage interest increases in value as the value of the home increases.

If you are paying attention you may say “Well I will just use my other itemized deductions to make it worthwhile”. Yes, the other itemized deductions are added in on top of the mortgage interest deduction to get a total amount. The downside is a lot of those other itemized deductions are not very easy to use. Take for instance the medical and dental expense deduction. You are only able to deduct expenses that are not reimbursed by insurance. And you can only deduct the medical and dental expenses that exceed 10% of your Adjusted Gross Income. Another possible deduction to add to you total to exceed the standard deduction is the charitable deduction. This deduction must have been donated to a qualified organization and comes with its own specific requirements to value the donation if it is not a cash donation.

The mortgage interest deduction provides no economic benefit to the bulk of Americans. The standard deduction generally is a better deal for most Americans. For tax filers with extreme health care costs, extreme charitable contributions or who pay above average mortgage interest costs itemizing deductions can provide a very meaningful deduction but is limited to use in very specific situations.