Why the home mortgage interest deduction isn’t as disappointing as I thought

Monopoly housePhoto courtesy of sling@flickr

Often when I play board games, I enjoy the process of losing as much as winning.

That’s why I love it when people comment on my posts pushing back against my arguments. I don’t consider myself an infallible expert in anything. I’m learning as I go.

And so when I’m wrong, I own up to it, and learn from my errors. And I can enjoy the process, because the benefit is in the learning.

So I’ll own up and say that my argumentation about the home mortgage interest deduction being disappointing was a little inadequate. It’s still disappointing, just not as much as I thought.

Let’s see why.

Recapping

When I first learned about the home mortgage interest deduction (HMID), I learned some distressing facts about it:

  • Not everyone can benefit from it.
  • Those who benefit from it don’t necessarily benefit from it for the entire length of the mortgage term.
  • Those who benefit from it are more likely to be wealthy.

All of these things are true (and disappointing), and the HMID is still not a reason to hold on to a mortgage.

But when I went to calculate my own benefit from this deduction, I oversimplified.

You can only take advantage of the HMID if you itemize deductions. And itemizing deductions only makes sense if your deductions are greater than the standard deduction.

This year, the standard deduction was $6,300. And I calculated that I’d be paying a little over $7,000 in mortgage interest this coming year. (Gulp.)

So with itemizing, I’m up. A little. And considering this is a tax deduction and not a tax credit, this would net me around $200.

And so I thought to myself: “big deal.”

Don’t forget about taxes when doing your taxes

But this was before I had actually done my taxes. And when I did, I found the numbers oddly in my favor. Apparently, I had enough deductions to make itemizing work.

Why? Since I had bought my home toward the end of the year, I paid almost no mortgage interest, certainly not enough to overcome the standard deduction. Why was itemizing working for me?

(Note that I was using online tax software as always, as it’s simple, and that’s how I like taxes.)

I’d taken the standard deduction every year, and so there were some areas of itemizing that I was unfamiliar with. For example, with the standard deduction, the amount of state and local taxes you’ve paid doesn’t affect your federal return, so to me, the two are completely unrelated.

And yet, when you itemize, those state and local income taxes become very relevant, because they are deductible on your federal return.

And it was the state and local taxes, combined with the paltry mortgage interest I had paid, put me over the standard deduction and into the Itemizing Zone. Next year will likely be even more favorable.

What you can itemize

So, to recap, here are some expenses that can be itemized (the IRS has a full list):

Many people can’t take advantage of these deductions, and that’s fine. But if you can, it would be foolish not to.

I consider it a total oversight that I omitted the deductible taxes from my calculations. But I’m pleased that I forgot about something that benefited me, rather than a penalty. How often does that happen?

Happy tax day! Have any tax stories, good or bad? Let them out here!

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

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Mike Pumphrey
Posted on April 18, 2016