Two questions left over from a recent chat got me thinking again about people's fixation with the home mortgage deduction.
Understandably, around tax time, people wonder if they're getting all the deductions and credits they are entitled to take. One of the most coveted tax breaks is on mortgage interest. So revered is this deduction that some folks who have the money to pay off their mortgages struggle over whether it makes sense to be debt-free. Here's an example:
Q: I have enough money in savings to pay off my mortgage in full and still have a cushion for emergencies. The money in the savings account earns far less than the interest rate on the mortgage. People are telling me that paying off the mortgage will negatively affect my taxes since I will no longer have that deduction. But, it seems to me that I only get a benefit of a portion of the money I pay out for the interest. I can live within my means without the mortgage payment and I do not live large (no cable, no cellphone, etc.) but I can't with it. It is important to me to max out my retirement savings/401(k), and that takes up a chunk of my paycheck. By the way, I'm single with no kids and in my 50s. What do you think?
Singletary: I know I'll get letters from people who will disagree with me, but I say go for being debt-free -- with a caveat.
If you itemize your tax return, you can usually deduct the interest you pay on a mortgage for your main home. The home mortgage deduction is different from a tax credit, a distinction that is sometimes lost on people trumpeting the tax break as a key reason to get a home or keep a mortgage. A tax credit reduces dollar-for-dollar the taxes you owe. A deduction eliminates only a percentage of the tax. If you don't have a mortgage, you may pay more in taxes but not as much as you would have to pay in annual interest on the home loan, especially in the beginning years. You are right on the money to appreciate how illogical it is to keep a mortgage just for the tax break.