Loving your mortgage at tax time

Making a mortgage payment can’t be classified as fun, and filing your income taxes is something many of us dread. But if you’re making mortgage payments, filing those taxes might not be quite such a burden.

Way back when the original tax code was written in 1874, it included a deduction for interest paid. While many in government have attempted to eliminate this deduction, and in fact have eliminated it for non-business costs such as interest paid on credit cards or personal vehicle loans, the deduction for mortgage interest remains.

Many recognize the deduction it as an incentive for homeownership – and home ownership is good for both individuals and communities. People who put down roots make for stronger communities, marked by pride of ownership.

The mortgage interest deduction allows you to subtract all the interest paid on your home mortgage from the income you report on your Federal taxes. For those with a high-balance mortgage, it results in a lower tax bill.

To take advantage of the deduction, taxpayers must itemize on Form 1040 A, sometimes it is better to hire a tax accountant to fill it our for you. This form includes deductions for medical expenses that exceed 10% of your income, real estate and personal property taxes, gifts to charity, un-reimbursed employee expenses, and miscellaneous fees such as tax preparation expenses. At present, it also includes mortgage insurance premiums.

For many, especially in the early years of a mortgage, when the payment goes more toward interest than principal, mortgage interest payments raise the total on this page beyond the standard deduction (currently $6,300 for singles and $12,600 for married couples) and results in a significant tax savings.

Let’s assume that your tax bracket is 28% – you and your spouse earn between $151,201 and $230,450 per year. If you purchase a home with a $300,000, 30-year mortgage at an interest rate of 4%, you’ll pay approximately $11,904 in interest the first year. Combined with property taxes, mortgage insurance, charitable giving, and other deductible items, you can expect to qualify for a deduction well over the standard $12,600.

As time goes by and your mortgage payments are weighed more heavily toward principal reduction than interest, the savings will be less, but it still pays to do the calculations and see where you stand each year.

Most of us agree that we can spend our own money more wisely than does the government, so all tax savings are welcome.

Naturally, your savings will depend upon your income and the interest you’re paying on your mortgage – in addition to the other deductions to which you are entitled.

Studies suggest that only about 54% of taxpayers with mortgages will receive a tax benefit. You could be one of them, so don’t fail to do the calculations and see if you qualify.

If so, be sure to take all the relevant information to your tax preparer!