Posted by Keith R. Williams on October 15, 2003, 4:02 pm
inevercheckthismailbox@yahoo.com says...
> cmquinn@mindspring.com (Charles Quinn) wrote in message
> >
> > Take the extra money and pay off your current mortgage. You are then getting
a
> > guaranteed return of your current interest rate, WITH NO RISK!
> >
> > Don't worry about your tax break. It is a fallacy. Yes you get a break from
> > Uncle Sugar, but you are still paying the bank for that honor. Last year
when
> > I did my taxes with and without my mortage, it cost me $2300 in interest to
> > have $300ish lower taxes. Take your own return and see how many thousands it
> > is costing you to get hundreds less in taxes. Subtract out your interest
> > payments and see what the difference is. Take that difference and compare it
> > with how much interest you paid to get that pittance.
> >
> > I am now mortgage free and will gladly pay that lower tax bill than that
> > higher mortgage tax, er interest payments.
>
> Charles,
>
> I think you are actually understating how worthless the mortgage
> interest deduction is these days.
>
> The real amount you save in taxes thanks to carrying a mortgage is
> equal to your interest expense less the amount of the standard
> deduction, multiplied by your marginal tax rate.
>
> The reason you subtract the amount of the standard deduction from your
> interest expense is because you would have received that much of a
> deduction even if you had no mortgage interest expense. The only real
> tax savings are to the extent your mortgage interest expense exceeds
> the standard deduction.
For many of us the standard deduction is already more than offset by
state and local tax payments. The federal (and state) mortgage
interest deduction is then the marginal tax rate times the mortgage
interest. For me that's somewhat north of a $2000 federal and another
$500+ state deduction. ...not chump change at all. Of course I'd
rather not pay any interest (nor state/local taxes ;-), but the
mortgage interest deduction does effectively reduce my mortgage
interest rate by ~40%.
> The standard deduction for a married couple for 2003 is $9,500, which
> means that unless you are in the first year of $160,000 (or greater)
> mortgage (assuming 6% interest), you will not save one penny in taxes
> because of the mortgage interest deduction because your interest
> expense won't exceed $9,500. Of course this would change if you had a
> lot of other deductible expenses too, but the average couple isn't
> going to.
Really? I have $5500 in deductible property tax, plus another $3K
(conservatively) in state income tax. Add in charitable contributions
and I'm well above the standard deduction without the mortgage. 100% of
my mortgage interest is deductible. I'm certainly not alone in this
situation. I'm not the only one in a socialistic state. :-(
> If you have a $200,000 mortgage at 6% in its first years your interest
> expense will be 12,000, less $9,500 is $2,500 multipled by .28 (your
> probable marginal tax rate if you have a mortgage this big) then you
> save $700. So you are paying $12,000 to save $700.
> I once overhead a woman say that she would pay off her mortgage but
> she needed the mortgage interest deduction on her taxes.
Of course that's silly. Whether paying off a low interest mortgage is
the smart thing to do is a far more complicated question though.
--
Keith
Posted by Chris Torek on October 16, 2003, 3:02 am
[I deleted a few newsgroups where this seemed inappropriate.]
>... Of course this would change if you had a lot of other
>deductible expenses too, but the average couple isn't going to.
(Probably not, but it is worth mentioning. A single person who
occasionally does consulting, for instance, might *almost* meet
the standard deduction to start with. Real estate taxes are also
deductible, and on California houses, can be significant. 1.15%
on an assessed value of, say, $450k -- i.e., a nice 2br starter
house where I lived until mid-2002 -- is $5175/yr in RE taxes
alone.)
>If you have a $200,000 mortgage at 6% in its first years your interest
>expense will be 12,000, less $9,500 is $2,500 multipled by .28 (your
>probable marginal tax rate if you have a mortgage this big) then you
>save $700. So you are paying $12,000 to save $700.
Unless of course you live in California and have a marginal tax
rate near 40%, as I did in the 1990s...
I remember going from the standard deduction (<$3.5k) to itemized
(nearly $24k). The $8000 saved in combined state and Federal taxes
made it *possible* to buy the house, with an 80-10-10 mortgage (10%
down, 80% conventional loan, 10% high-rate 2nd mortgage, no PMI).
It had doubled in price -- actually slightly over 2x -- when I sold
it in 2002. I figure I put at least $150k in, in PITI and upkeep
and repairs, over the 7 years. Rent (at least $1k/mo in that area,
probably closer to 1200-1500 for something similar to the house)
would have run between 84 and 126 $k, for the same 7 years. There
were also the refinance costs in 1998 when 30-year rates hit 6.5%.
There are enough variables to make it hard to figure out exactly
how this particular situation worked out -- but the leverage worked
in my favor in this case, because the price went up. Had the price
gone down, it would have worked against me.
As for the "pay off the mortgage" question: *if* your existing
deductions are at or over the "standard deduction" level, *and*
you are in the early years of the mortgage, you can get a first
approximation by taking your mortgage rate and reducing it by your
marginal tax rate. Thus if your 30-year loan is at (say) 5.75%
and your marginal tax rate is 35%, then your effective loan rate
is (not quite as good as) 5.75 x (1 - .35) = 3.7375%. Today's
10-year T-bond yield is 4.397%, so you could put $10k into a T-bond
and "win" by (not quite) .6595%. But remember that your deduction
value decreases over time; in 10 years you will no longer be ahead.
(On the other hand, if you believe -- as I do -- that the 10-year
yield will rise to about 5% within the next few years... well, I
suppose it depends on how strongly you believe that. Also, my
current mortgage is a 10-year, not 30-year, at 4.75%; but Utah does
not tax the clothes off one's back like California, either, and
Federal tax brackets have gone down. Still, this year's stock
market returns so far have handily beaten even the unadjusted 4.75%.
On the other other hand [the foot?], there is a certain Good Feeling
about having a fully-paid-for home. Decisions, decisions :-) )
--
In-Real-Life: Chris Torek, Wind River Systems
Salt Lake City, UT, USA (40°39.22'N, 111°50.29'W) +1 801 277 2603
email: forget about it http://67.40.109.61/torek/index.html (for the moment)
Reading email is like searching for food in the garbage, thanks to spammers.
Posted by Andy on October 16, 2003, 2:15 pm
>
> Really? I have $5500 in deductible property tax, plus another $3K
> (conservatively) in state income tax. Add in charitable contributions
> and I'm well above the standard deduction without the mortgage. 100% of
> my mortgage interest is deductible. I'm certainly not alone in this
> situation. I'm not the only one in a socialistic state. :-(
>
You are right. I was completely forgetting about all the people who
live in the Northeast and similar areas. I am in Tucson AZ and our
property tax is maybe $1,500 and I don't think our state income tax is
very high at all. I know that for people in the New York area property
taxes can easily be $6,000 a year.
My apologies to those with high property taxes.
Andy
Posted by Keith R. Williams on October 16, 2003, 10:39 pm
inevercheckthismailbox@yahoo.com says...
> >
> > Really? I have $5500 in deductible property tax, plus another $3K
> > (conservatively) in state income tax. Add in charitable contributions
> > and I'm well above the standard deduction without the mortgage. 100% of
> > my mortgage interest is deductible. I'm certainly not alone in this
> > situation. I'm not the only one in a socialistic state. :-(
> >
>
> You are right. I was completely forgetting about all the people who
> live in the Northeast and similar areas. I am in Tucson AZ and our
> property tax is maybe $1,500 and I don't think our state income tax is
> very high at all. I know that for people in the New York area property
> taxes can easily be $6,000 a year.
In the metro NY/Westchester area $6K is *cheap*. I live in the
People's Republic of Vermont (across the pond from upstate NY),
and my 1800 sq.ft. contemporary-cape on a 1/2 acre (that I bought
for $150K, ten years ago) is $5500/yr in local property taxes.
My state income tax is 1.4 of my federal tax. Just to make the
picture complete, we also have a 6% sales tax and a 11% meals tax
(and 17% + 2$/day on a car I'm renting next week).
> My apologies to those with high property taxes.
No need to apologize, though a sniff of condolences might help.
;-) Retire here? You must be kidding!
--
Keith
Posted by Ray on January 17, 2005, 9:03 pm
What's the property tax rate in Tucson, AZ today? Someone told me it's
similar to California's (about 1.25%). We are considering moving to
Tucson next year.
Thanks,
Ray
Andy wrote:
> >
> > Really? I have $5500 in deductible property tax, plus another $3K
> > (conservatively) in state income tax. Add in charitable
contributions
> > and I'm well above the standard deduction without the mortgage.
100% of
> > my mortgage interest is deductible. I'm certainly not alone in
this
> > situation. I'm not the only one in a socialistic state. :-(
> >
> You are right. I was completely forgetting about all the people who
> live in the Northeast and similar areas. I am in Tucson AZ and our
> property tax is maybe $1,500 and I don't think our state income tax
is
> very high at all. I know that for people in the New York area
property
> taxes can easily be $6,000 a year.
>
> My apologies to those with high property taxes.
>
> Andy
XML site map
> >
> > Take the extra money and pay off your current mortgage. You are then getting
a
> > guaranteed return of your current interest rate, WITH NO RISK!
> >
> > Don't worry about your tax break. It is a fallacy. Yes you get a break from
> > Uncle Sugar, but you are still paying the bank for that honor. Last year