Your Mortgage Interest Deduction Isn't as Great a Tax Savings as "They" Claim

I will pay $4,320 in mortgage interest this year. 

And it will only save me $60 in Taxes.

The tax savings touted for mortgage interest is a terrible myth -- one of those that also convinces us it's okay to buy bigger houses and helped get us into this housing mess.


Yet financial gurus like Ric Edelman in his latest book  "The Truth About Money," try to mitigate the pain of paying mortgage interest each year by saying "oh, you really aren't paying all that much interest -- because you are saving 25% of it in taxes, if you are in the 25% bracket and itemizing on schedule A."  

In real life, this is ot necessarily true and certainly not true for a lot of single people!  You must do at least a simple analysis (see example below) before you really know.   I used Quicken and the IRS tables for back-up and checking.  You can do the same in about an hour and if you don't have Quicken, the IRS 2011 tax tables will do.

Even if you file as a single person - one of the least favorable tax statuses --  you can get a standard deduction of $5,800.  You don't need mortgage interest and schedule A itemizing to get that deduction

Standard Deduction Table for 2011 rates can be found here or on http://www.irs.gov. 

Templates for Comparison

  (using Quicken 2010 Tax Planner software)

My 2011 Taxes Using Standard Deduction Only

Adjusted Gross Income             $56,364

Standard Deduction                     $5,800

Exemptions                                  $3,650

Taxable Income                          $45,695

Taxes owed =                             $7,605

(with Schedule A - itemizing mortgage) 

My 2011 Taxes Using Schedule A Deductions

Adjusted Gross Income     $56,364

Itemizing Schedule A 

     Mortgage Interest                    $4,320

     Real Estate Taxes                        $780

     State Taxes                              $1,861

     Charitable Deductions                 $250

Exemptions                              $3,650

Taxable Income                         $45,495

    Taxes Owed                             $7,555*

If you have a jumbo mortgage and a whole lot more interest on your loan each year than I do, I can see why you would spend time focusing on how your tax bill isn't quite as large as it might be.  But for those of us who are single and scaled down in terms of housing needs and debt -- this argument for borrowing money on a mortgage is downright wrong. 
         
*Based on 2010 tax tables.