October 24, 2013

The tax deduction for owning a home is overhyped. Why is it not so great for low to moderate income workers? Hint: Think standard deduction.

4 thoughts on “October 24, 2013”

  1. Alex Christianson says:

    If you are single the tax deduction is $5,700. This of course being low to moderate income worker still have large amounts of debt to deal with proportional to your income. These tax deductions may encourage persons with low income to take more house debt than they can handle, resulting badly.

  2. Mike Finley says:

    You are getting close Alex, but you are not quite there. Try again. Anyone else?

  3. Karen says:

    The deduction can be done only if you itemize your deductions. The typical low to moderate income taxpayer probably doesn’t have sufficient deductions to be able to itemize.

  4. Mike Finley says:

    You got the central theme correct Karen. Any mortgage deduction only kicks in when your itemized deductions rise above your standard deduction in any given year. A married couple of two has a standard deduction of $12,200 in 2013. Just as Karen stated, you only get the benefit if your mortgage deduction (interest paid and property taxes) run beyond that. Also, your only real benefit is the amount above that minus $12,200. Here is an example:

    Your mortgage deduction runs to $18,000 and your marginal state and federal tax rate is 30%. One would think you got a $5,400 tax deduction (18,000 x .30). That would be wrong. The only benefit you got was what is above the standard deduction, which you already had. In this case your actual benefit was $5,800 (18,000 – 12,200). 30% of that is $1,740.

    The Moral of the story? High income people get the best bang for the buck with the mortgage deduction. Low to moderate income people get the least. DO NOT let anyone convince you different. Buy a home because you can afford it and it is the right place to raise your family. Ignore the hype over the tax deduction. The people who benefit the most are the real estate industry (commissions), governments (property taxes), private industry (filling your house up with their stuff), and high income people (people making well beyond $100,000 per year). Those are the facts.

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