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Mortgage Deductions Don’t Exist for Everybody

When I wrote about paying off our rent house, a few people emailed me about the mortgage deduction benefit that we’d be losing.  Luckily, that wasn’t ever an issue.  Even with two mortgages, our mortgage interest and other deductions simply never added up to more than the standard deduction (which was $11,900 for a married couple filing jointly last year).

Standard Deductions

 

The Math

Here’s the breakdown for us.  The following are the deductions that can taken and what they added up to for us last year (and I rounded up):

  • Medical Bills – $1000 in some copays and medicines (which I am not even sure are deductible)
  • State and Local Taxes like sales tax – less than $2000
  • Charitable Deductions – $500 (I volunteer time)
  • Mortgage Interest – less than $2500
  • Losses from Theft – $0 thankfully
  • Job Expenses like travel – $1000 and that would really be pushing the definition
  • Total = $7000

So in our case, the $11,900 standard deduction was definitely more to our benefit and has been since we got married in 2005.  We always run the numbers just to make sure, but for us, the standard deduction is simply the way to go.

When Itemizing Works

Yet, itemizing is still obviously a great choice for some people.  One of our close friends, J, files as a single individual.  Between her medical bills and her mortgage interest, it was just a smart idea for her to itemize since that total was greater than the $5950 standard deduction that she could have taken.  I also know several couples living along the coasts where housing is more expensive so their mortgage interest is astounding comparably.  The standard deduction would be a bad idea for them.

So I am by no means saying that the standard deduction is for everybody.   I just wanted to remind everyone that mortgage interest is not always tax deductible for everyone.  It isn’t automatically a benefit of home ownership or debt.

For us, the biggest decision was whether to pay off debt or invest, so at best, we made a 4.5% return on about $22,000 this past month.  At worst, we have to accept the opportunity cost of anything else we would have done with that money instead.  In the end, I like the guaranteed return and being down to only one main mortgage again.  The feeling of security is worth a bunch to me, but I do have a ton of respect with everyone with a better risk tolerance than me.

Do you take the standard deduction or is itemizing better for you?

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30 comments to Mortgage Deductions Don’t Exist for Everybody

  • We take the standard deduction. When mortgage rates were higher more people got the deduction because they were paying more in interest. I’d rather get the standard deduction and pay less in interest myself.

    The other people who take it are those who have much more expensive houses :)

  • MikeS

    Just out of curiosity, no real estate taxes? That’s where a chunk of my deduction comes from along with the interest. Also too, to be able to deduct medical expenses last year, the expenses had to be over 7.5% of your adjusted gross income. I know this because I hit the threshold. I had a lot of deductions last year.

  • retired

    If you list your real estate as supplemental income you can then take of the mortgage expenses on the supplemental income deductions and still take the standard deduction.

  • We itemize as it makes sense year over year. In the next couple of years we’ll be approaching the cutoff, at which point we’ll probably do a few years of paying a mortgage payment and the winter tax bill so that we can itemize, take the standard deduction the next year, and flip back and forth for as long as we can.

    Not being able to itemize means you’re paying a low amount in interest (for most people) which is always a good thing if you think about it!

  • We itemize. Our donations are bigger than your total itemized deductions, never mind everything else!

    But rental mortgages aren’t part of a personal deduction, anyway. You should be filling out Schedule E, Part I, for your rental income, and THAT’S where your mortgage interest gets deducted, along with property depreciation and maintenance expenses. It doesn’t come off as part of your personal deductions. It doesn’t matter that you take the standard deduction–rental income is separate. It should never hit your main 1040.

  • This is a great post. It seems to me like so many people misunderstand the tax benefits that come from home ownership. Even if you were able to itemize, it’s really only the itemized amounts ABOVE the standard deduction that are giving you any real benefit. And like Lance said above, it’s much better to pay less interest and get a smaller deduction.

  • @Lance, I rather pay less interest too. Yeah, more expensive houses or more medical bills…

    @MikeS, our real estate taxes last year were around $3000. Forgot about those, thanks!

    @retired, yep. :-) This year, we’ll be doing just that. :-)

    @Money Beagle, I think it’s great. :-D I just wanted to stop getting the “you’re being a little stupid” emails, lol.

    @Jenny, yeah, I don’t trust organizations with money, so I donate time. My last main two volunteer jobs have been with hospice care and Meals on Wheels.

    We lived in our last house (now the rental) until mid-October of last year (our home wasn’t finished until then), so it was our home for 2012 taxes. We know about the Schedule E. Thanks though.

    @Matt, exactly. :-)

  • Itemizing is way better for us, but I appreciate this post because I pulled out our return to find out exactly why. We have pretty heft numbers in taxes paid, interest paid, and charitable contributions, so I guess we’ll be itemizing for a while.

  • Some of your expenses are attributable to the business. I think you may want to consult a CPA.

  • Not that you actually deducted this, but I don’t think you can deduct time spent as charitable contributions, only cash or property. So you’d be even farther away from taking the itemized deduction.

    For many of us, the state taxes (which are deductible) push the itemized amount way up. You obviously don’t have any of those :)

  • @Julie, glad you checked but yeah, it’s normal for itemizing to make sense. :-)

    @krantcents, we take a ton of expense deductions for the business, but it is on the Schedule C, so it eats off of what we make, which generally means we can show our actual numbers after expenses. But it’s not on the 1040 part that is for deductions to your overall taxable income.

    @Daniel, oh, I knew that part. We actually paid $500 to charities overall. I was explaining that it wasn’t more because I donate time mostly instead of money. I don’t trust organizations with money but I don’t mind helping. :-) And yeah, we have an 8.25% sales tax but no state tax, which is nice. :-)

  • Itemizing makes sense for us, I think–thanks for your clarifying insight to this. What are your thoughts on withholdings?

  • Last year, I itemized around $9k. This year, I will itemize around $10-11k. So if I was married, I wouldn’t be itemizing either, but as a single person, I’ll save a bit on my taxes. As I pay off the mortgage over the next few years, the tax savings will go down drastically and not really be worth it. It’ll be worth a bit next year (2014) and then not really worth anything after that.

  • Just like most of the comments here, we itemized as well. It makes so much sense.

  • I don’t have much I can itemize yet, so standard deduction for me as well.

  • cjb

    I itemize. I live in the land of the rain tax…seriously.

    My husband also volunteers and we do donate but not a big chunk of our deductions…not like the property tax and the mortgage interest. If I were staying in this home for the long run, I would still like to pay it off, decrease my risk. I’d still be able to itemize because of property taxes and donations….

  • We itemize, and we still owe… :(

    By the way, hello!

  • When you file your tax return for the previous year, you file based on your situation as of December 31st of the filing year. If you got married on December 30th, you are considered married filing joint for the entire year. If you had a baby on December 31st, you get the exemption for the child and anything else applicable to the child, even if the child was born at 11:59 PM on December 31st.

    If you moved into a new home in October, that new home and any resulting deductions should have went on a Sch A, Itemized Deductions: points, real estate taxes, mortgage interest, and any other deductible home buyer expenses that were deductible. That is why a tax preparer will insist on seeing all closing documents when preparing your tax return; he/she can pick and choose what deductions to take for the purchase, and everything is line item listed on the closing docs. You still might not have hit the standard deduction threshold by doing this, but regardless, those expenses are deductible for that filing year – not the next.

    Rental property: all rental property income, expenses, mortgage interest, repairs, depreciation, etc., etc., go on Sch E. Even if you rented the home out in October and only for 3 months that year, you are still eligible to file a Sch E on those rental months and take the appropriate deductions. When it comes to mortgage interest for the year, you would prorate that and claim 3 months on Sch E, the remaining 9 months on Sch A.

    Federal law states the rental becomes a rental and is eligible for use as such, tax wise, the day it is available for rent – not the day it is rented. It could have sat empty for those 3 months and you were still eligible to deduct all related rental expenses on Sch E.

    It sounds like you had property taxes for both homes that year. You would prorate those, too – claim what is personal on Sch A for the new home and old home, claim the rental portion on Sch E as property tax expense.

    I’m not sure what is behind the remarks about these schedules (A, E, etc) not affecting your Form 1040. They affect the Form 1040 in a big way. Rental income does hit the 1040 – as income or loss via Sch E.

    Rental income should not be included on Sch C. Sch C is for business income only, Sch E for rental income only. Never the two shall mix. :-)

    The remarks about paying a lower interest rate is good and taking the standard deduction is always good due to less interest being paid – these remarks puzzle me, too. If you claim home mortgage interest on a Sch A, and qualify to file Sch A, that reduces your federal tax rate on your entire taxable income – at times, for some people, quite drastically.

    It is not a sin to take Sch A deductions over the standard – quite the opposite, in fact. Seeing your federal tax rate fall from 28% to 20-22% or 15% to 8%, or lower due to home mortgage interest will save you a LOT more money, over the years, than paying a cheaper mortgage interest rate ever will. Perhaps I am misunderstanding what is being said above, but I don’t think a lot of people making comments about this understand the specifics of how home mortgage interest reduces your federal tax rate.

    Re: Charitable time spent. You’re right, Crystal, you cannot take a deduction for time spent working for a charity – but you CAN deduct your mileage for that charity work. 14 cents a mile for every mile driven. This goes on Sch A, too, in the Charitable Contribution section)

    :-) :-) :-)

  • Carrie

    Crystal, I’ve read your blog for a while and I’ve got to say I’m disappointed that you guys don’t donate more. All of the reputable charities provide (audited) reports on how much is spent on overhead vs. the organization’s mission.
    As for medical expenses, as was mentioned earlier, last year you could deduct any expenses over 7.5% of AGI, this year it was increased to 10% (thanks to Obamacare). So if you make $50,000 and spend $6,000 on medical costs you can deduct a whopping $1,000 (if you itemize). We are not self-employed but have an individual health insurance policy so this is the only way we can get any deduction for the premiums (vs. if our employer paid the premiums it would all be pre-tax dollars). Not cool.

  • @Mike, I emailed you but what withholdings are you referring to? My brain must be fried…

    @Leigh, sounds right. :-)

    @KC, yep for most…

    @Bobby, yep.

    @cjb, rain tax? Seriously, what is that?

    @Kris, HI!!! Where have you been?!

    @Wendy, I think we all mean that it is a good thing when you actually end up wanting to take the standard deduction rather than itemizing because it means that you had less expenses. Not that itemizing is bad. Itemizing is great if you save more than you would with the standard. I was just explaining that not everyone has more itemizations than the standard deduction covers anyway. And thanks for the forms explanations. It lines up with what we knew too.

    @Carrie, it is odd when someone expresses disappointment in something I see as good. I think me giving time is either more important or as important as me giving money. The organizations I support generally need human help just as much or more than cash. I mean, they’d love money TOO, but I really rather simply help than worry about how anybody uses my money. All of that said, I am really glad that you’ve read for a while and guess it’s great that the worst thing you’ve ever disagreed with is how much cash I donate, lol.

    About health insurance, we spend about $4250 a year on it and make around $100k AGI, so we wouldn’t be able to deduct anything, right? Since 10% is $10,000 and we spend less than that? Just making sure I understand correctly. :-)

  • The Sch A medical expense 10% threshold increase does not affect everyone in 2013 – it depends on age and that 10% rate won’t be effective for everyone until 2017.

    Sch A is not the only way to deduct health care expenses. If you are concerned about not being able to deduct health care expenses via Sch A, I have three words for you: Health Reimbursement Account (HRA).

    With an HRA 100% of ALL qualified medical expenses for the entire family are deductible against income, and Sch A doesn’t come into play. With an HRA, even some over-the-counter meds are deductible if your doctor will write a note that you need them. You have to set it up right and you have to maintain the correct records, but it’s the only way to go if a person is self-employed.

    If you’re not self-employed, you can fix that in a minute by setting up a small business and in turn establishing an HRA, (it may be time to sell a few things on ebay and call it a business) or talk to your employer about setting up an HRA, or check and see if they already have one established. There has been a large influx into HRA’s by business the last couple of years, and you’ll see many, many more headed in that direction in the future.

  • Paul

    @Wendy Income Tax is a marginal system so you say you’re in the 25% tax bracket only the income above $35,351 is taxed at 25%, not your entire income.

    Example of single person earning $40,000:
    Income from $0 to $8,710 is taxed at 10% ($8,710 x 10% = $871)
    Income from $8,701 to $35,350 is taxed at 15% ($26,640 x 15% = $3,996)
    Income from $35,351 to $40,000 is taxed at 25% ($4,650 x 25% = $1,162)
    So you’re in the 25% tax bracket but your total tax bill is only $6,029, not $10,000 ($40,000 x 25%)

    Financially, it is ALWAYS better to not incur an expense than to claim a deduction afterwards.

    (I’m an accountant and this line of thinking irks me to no end)

  • Paul

    And I forgot to mention, dropping income from $40,000 to $35,350 means you only save $1,162 ($4,650 x 25%). The income tax rates on the remainder of your income don’t change.

  • Paul

    Urgh, final post (hopefully)…

    This also means that jumping up into the next tax bracket isn’t anywhere near as bad as most people claim it is. It’s only the income over the threshold that’s taxed at the higher rate, not the entire amount.

  • Paul, you’re singing to the choir :-) I’ve been an accountant and professional tax preparer for over 25 years; EA, IRS Revenue Agent, taught tax law, etc.

  • We haven’t been able to itemize for quite a while due to no or low mortgage interest. I don’t understand people who think it’s better to pay interest (and have debt) for a tax return.

    I had a aunt who thought it was better to claim social security (even though she needed it) because they’d have to pay taxes on it.

  • Jonathan

    My wife and I have itemized ever since we were married. We don’t have any major medical expenses because we’re young, and we don’t have mortgage interest because we rent our home (our rental properties are on Schedule E). Most of our deductions are for charitable giving, plus in 2012 we maxed out our health savings accounts in anticipation of starting a family. Last year we had over $40k in deductions which helped toward getting a nice tax refund.

    It’s interesting to me that you don’t trust with your money even those charities you donate your time to. We are very involved with one particular charity which does overseas missions work, and we know well how the money is spent, and so are happy to give. I can understand being uncertain about giving to an organization you know nothing about, but regular volunteering should lead to a pretty good idea of whether it’s a worthy organization or not.

  • […] Budgeting In the Fun Stuff – Mortgage Deductions Don’t Exist for Everybody […]

  • […] Mortgage interest deductions don’t exist for everybody or at least Budgeting in the Fun Stuff (and me). […]

  • […] Mortgage Deductions Don’t Exist for Everybody at Budgeting in the Fun Stuff. The mortgage deduction isn’t as great as many people think. My mom was only able to take the mortgage deduction for the first couple of years after she bought her house and that was only because she also had a large charitable deduction. Without the charitable deductions she wouldn’t have even been able to deduct her interest the first year she bought her home. […]