It’s Tax Time Again – Deducting Interest

30 Apr

Metro® Boston, Publication Date: March 30, 2011

By Attorney George Warshaw 

Last week I wrote about the advantages of paying off your mortgage early. A reader asked whether that was wise since a homeowner gets a tax deduction for all or part of the mortgage interest one pays. 

I’ve known many homeowners who say they like to have a mortgage so that they can deduct the interest on their taxes. I’ve never fully understood the rationale. 

A mortgage is not an investment; it’s a debt.  A dollar of mortgage interest does not reduce your taxes by a dollar. A homeowner only gets to offset income taxes by a percentage of that dollar. 

A tax deduction is not a tax credit. A tax credit reduces your taxes dollar for dollar. A deduction merely reduces the amount of income subject to tax. Here’s an example: 

Let’s suppose you are single and your taxable income is between $34,000 and $82,400. Of every taxable dollar you earn over $34,000, 25% (or 25 cents) is paid to the IRS in income taxes. Since a dollar of mortgage interest merely reduces your income by a dollar, a dollar of interest saves you only 25 cents. 

If you don’t need a mortgage, talk to your accountant or lawyer about the best tax strategy for you. © 2011 George Warshaw. 

The foregoing is not intended as legal advice. Consult an attorney to see how or if the foregoing applies to you.

Attorney George Warshaw represents buyers and sellers of homes, condos and investment properties, prepares wills and trusts for inheriting real estate, and trusts that protect your children and pets. George welcomes new clients and questions at  george.warshaw@warshawlaw.com.

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