16 Dec Mortgage Interest Deduction Phases Out with High Income
One of the benefits of home ownership is that mortgage interest as well as property tax can be itemized on your tax returns for deduction. This is one the top reasons my mother-in-law insists why I should buy a home. It sounds plausible although you still have to spend money to save money. I’ve mentioned before that I feel that mortgage interest deduction is more of a perk than a reason for owning a home.
How Mortgage Interest Deduction Works.
Let’s say you bought a McMansion and pay about $40,000 a year on your mortgage interest alone (think 30-year loan). Your adjusted gross income before any deductions is $700,000 as a neurosurgeon. For simplicity’s sake, you could potentially reduce your tax burden by $40,000 by deducting your mortgage interest. This means that the government will tax you as if you made $660,000 that year instead. At a marginal tax of 39.6%, you “saved” $15,840 of federal taxes! That’s right, by spending $40,000 of your money, you’ve saved yourself from paying $15,840 in taxes (Yes, you are also building equity in real estate in the process)
High Income Earners Get Hit with the Pease Limitation.
If you are a high income earner, you don’t get off the hook that easily. The Pease limitation starts phasing out how much you can deduct as your gross income increases. For 2015, this phaseout range begins at $258,050 for a single filer (not married).
The deduction amount is decreased by 3% of the difference between your gross income at the phaseout limit. For the neurosurgeon example, this amount is: ($700,000-$258,050) x 3% = $13,258.50. This means that instead of deduction $40,000 in mortgage interest, the neurosurgeon can only deduct $40,000 – $13,258.50 = $26,741.50. At a marginal tax bracket of 39.6% your deduction is not pocket change, but it is certainly still reduced.
Buy A Home For the Right Reasons
Don’t just buy a home for the mortgage deduction with the expectation that you can sell it in a heartbeat if you need to move. Understand that home ownership comes with both perks and headaches. There are plenty of people who opt to rent for life. As a high income earner, you will be hit with phase-outs. Remember that the Pease limitation is annoying but not a reason why you shouldn’t own property. If it stings you, the way out is to make more money. Hustle.
(Photo courtesy of 401k 2012)