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No Mortgage, No Write-Off?
I have been told that if I pay off my mortgage I can no longer write off my property taxes. This seems like a downer. What’s up with that?
If you’re a homeowner then you likely write off mortgage interest, mortgage insurance premiums and the cost of property taxes. For owners who itemize deductions, these are big items that can significantly reduce tax payments.
Say you have a $150,000 mortgage balance and pay $100 a month for mortgage insurance and $200 a month for property taxes. In rough terms, at 4 percent interest, you pay $500 a month for interest. In total that’s $800 a month or $9,600 a year. If you have a combined federal and state tax rate of 32 percent then you can reduce your tax bill by almost $3,100.
When you pay off the mortgage, several things happen.
First, if there’s no mortgage there’s no mortgage interest. So that deduction goes away.
Second, if there’s no mortgage there’s no mortgage insurance. Another deduction goes bye-bye.
The situation with property taxes is a little more complex.
Residential property taxes are deductible, so there is still a potential $2,400 write-off ($200 x 12). However, you may not want to take the deduction – and this is why someone may have told you that the deduction could be lost.
According to the IRS, there are two main types of tax deductions: the standard deduction and itemized deductions. You can claim one type of deduction on your tax return, but not both. For example, if you claim the standard deduction, you cannot itemize deductions, and vice versa (if you itemize deductions, you cannot claim the standard deduction). You are allowed to use whichever type of deduction results in the lowest tax.
Is it better to itemize or take the standard deduction? That depends on how much you have to deduct versus the standard deductions available in your situation. According to the IRS, for 2015 you could deduct $6,300 if a single filer; $12,600 if married and filing jointly; $6,300 if married and filing separately,; $9,250 for a head of household; and $12,600 as a qualifying widow or widower.
When you pay off your mortgage you reduce monthly cash costs. Those costs include mortgage interest, mortgage insurance (if any) and principal. For a $150,000 mortgage at 4 percent over 30 years, the cost for monthly principal and interest would be $716.12. In our example we said that mortgage insurance was $100 a month, so in this case the borrower saves $816 a month in cash or $9,792 annually.
In turn, you lose deductions for interest and property insurance but a potential deduction for property taxes remains. Principal was not deductible in the first place.
In the end it’s not so much that you can’t continue to write off property taxes but rather that using the standard deduction may be a better option, depending on the amount you can itemize and your filing status. For more details, talk to a tax professional.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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