I need $200,000 to pay off my mortgage. I inherited $350,000 and I still have 10 years before I have to retire. Does paying off my mortgage earlier make me lose my tax deduction?
My client, Jimmy Smith, asked me this question last week.
While you can come up with a decision pretty easily, investing your money while the market is not doing well is something you would have to reconsider, especially if you want a large nest egg in retirement.
For Jimmy's situation, he really wants to pay off his mortgage. So he wanted to evaluate the tax consequences of paying off a mortgage.
Although financial gurus will be able to provide you with the list of benefits and a projection of how much you will be able to save, it is always good that you get to see the numbers yourself. Most of the time, people overlook the fact that there is very little tax savings associate with having a mortgage payment.
The IRS gives you a standard deduction of slightly more than $10,000 each year from you if you are married. This would mean that tax deductions are given when your mortgage and local state income taxes are more than $10,000. As most Americans do not go over this limit, they don't qualify for itemized tax deductions and get the standard deduction. They dont get the benefit of the extra mortgage interest paid on their mortgages.
Okay so lets say Jimmy becomes one of the fortunate ones and he ends up paying taxes of 16,000 which includes the mortgage interest. In this example Jimmys real benefit of savings is $1500. Jimmys tax savings is only $1500. Please note this is not tax advice and you have to look at your situation carefully with an advisor.
Is it worthwhile paying all that mortgage interest just to get back an additional $1500 in tax savings at the end of the year? I would rather pay off my mortgage and keep all the mortgage payments for myself rather than worry about the tax savings.
The last 10 years of your monthly repayments for your mortgage would mostly be for your principal rather than your mortgage interest. This is one thing that your financial advisor would most likely not point out to you.
This means that the tax deductions from your mortgage interest will still be very much close to zero. At the end of the mortgage, you will even find out that there are no tax savings at all.
By calculating this yourself you will get to a point where for every dollar you spend in interest you may get back 25c as a tax deduction (depending on your situation). What would you prefer.
It will be a very different situation once you retire.
If your mortgage requires you to pay $1200 a month, you will have to use $1800 from your retirement funds just so you can pay off your mortgage. Imagine your retirement dollars would have to suffer just because you have to pay your monthly bill plus the taxes.
Tax consequences for mortgage deductions upon retirement are largely situational. If and when your income decreases upon retirement, chances are you would not meet the criteria for getting more than the standard $10,000 tax deduction. By then, tax consequences will be so little, youd find them almost negligible and you would lose all the benefits of having a mortgage payment.
In Jimmy situation, he doesn't need to worry about the tax cut consequences of paying off his mortgage. When he retires he has peace of mind knowing that all the retirement savings are his to keep.
My client, Jimmy Smith, asked me this question last week.
While you can come up with a decision pretty easily, investing your money while the market is not doing well is something you would have to reconsider, especially if you want a large nest egg in retirement.
For Jimmy's situation, he really wants to pay off his mortgage. So he wanted to evaluate the tax consequences of paying off a mortgage.
Although financial gurus will be able to provide you with the list of benefits and a projection of how much you will be able to save, it is always good that you get to see the numbers yourself. Most of the time, people overlook the fact that there is very little tax savings associate with having a mortgage payment.
The IRS gives you a standard deduction of slightly more than $10,000 each year from you if you are married. This would mean that tax deductions are given when your mortgage and local state income taxes are more than $10,000. As most Americans do not go over this limit, they don't qualify for itemized tax deductions and get the standard deduction. They dont get the benefit of the extra mortgage interest paid on their mortgages.
Okay so lets say Jimmy becomes one of the fortunate ones and he ends up paying taxes of 16,000 which includes the mortgage interest. In this example Jimmys real benefit of savings is $1500. Jimmys tax savings is only $1500. Please note this is not tax advice and you have to look at your situation carefully with an advisor.
Is it worthwhile paying all that mortgage interest just to get back an additional $1500 in tax savings at the end of the year? I would rather pay off my mortgage and keep all the mortgage payments for myself rather than worry about the tax savings.
The last 10 years of your monthly repayments for your mortgage would mostly be for your principal rather than your mortgage interest. This is one thing that your financial advisor would most likely not point out to you.
This means that the tax deductions from your mortgage interest will still be very much close to zero. At the end of the mortgage, you will even find out that there are no tax savings at all.
By calculating this yourself you will get to a point where for every dollar you spend in interest you may get back 25c as a tax deduction (depending on your situation). What would you prefer.
It will be a very different situation once you retire.
If your mortgage requires you to pay $1200 a month, you will have to use $1800 from your retirement funds just so you can pay off your mortgage. Imagine your retirement dollars would have to suffer just because you have to pay your monthly bill plus the taxes.
Tax consequences for mortgage deductions upon retirement are largely situational. If and when your income decreases upon retirement, chances are you would not meet the criteria for getting more than the standard $10,000 tax deduction. By then, tax consequences will be so little, youd find them almost negligible and you would lose all the benefits of having a mortgage payment.
In Jimmy situation, he doesn't need to worry about the tax cut consequences of paying off his mortgage. When he retires he has peace of mind knowing that all the retirement savings are his to keep.
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To know more and answer the question whether or not to pay off my mortgage early go to the free mortgage accelerator calculator and enter your details today,to see how much mortgage interest you can save. You will also be in a position to determine and answer your question Pay Off My Mortgage by determining the extent of your savings and the mortgage interest you are saving and if strategy this is a smart decision for you.
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