When it comes to the payment of taxes, many Americans are ecstatic at the possibility of a tax deduction. Among all of the American tax deductions that a person could be eligible to receive, the mortgage rate tax deduction is the most valued. In fact, there are homeowners, realtors, and future homeowners who believe that the mortgage rate tax deduction guarantees advantages more than disadvantages. Read on for some truths about mortgage rate tax deductions.
Homeowners End Up With Nothing
Do not let the numbers alarm you too much, but when it comes to mortgage rate tax deductions, homeowners usually end up with nothing. In fact, in 2005 only 54% of the taxpaying population who paid interest on their home mortgages received a tax deduction. That means that a whopping 46% did not receive a tax deduction at all. And even if you happen to fall in that measly 54%, you may not receive all the benefits that you were expecting to receive.
This disappointment is likely to occur among homeowners because not many homeowners are aware of what a mortgage rate tax deduction really entails. The misconceptions are so widely believed that many people choose to own home solely based on the myths that surround homeownership and mortgage rate tax deductions. Below are the two misconceptions that often mislead people into homeownership:
· All Homeowners Receive A Tax Break.
Regardless of the mythical hype behind tax breaks and owning a home, there are a large number of people who own homes but do not get any breaks on taxes through mortgage rate tax deductions. You must remember that the only way to be eligible for any deduction, you must document all of your deductions when you are figuring out their liabilities for being taxed. Documenting such deductions allows the chance to account for certain expenses, including mortgage interest. Typically, mortgage interest is the biggest expense for homeowner, hence making mortgage rate tax deductions a big force for people to buy homes.
You must also keep in mind that using a mortgage rate tax deduction may not be a reasonable option for all homeowners. It will depend on your filing status. Your deduction will be different if you are filling as head of household or filing separately or with a spouse. Also, if you are a taxpayer who has no deductions to equal the amount of standard deduction, or if you are a taxpayer who does not have enough items that qualify for deductions, you will not benefit from mortgage rate tax deductions.
· All Monies Paid In Mortgage Will Result In A Tax Deduction.
If you are a homeowner who has itemized taxes and are eligible for mortgage rate tax deductions that does not mean that you will receive the large amount you were expecting. In fact, the deduction will only be a small portion of the interest that you had already paid on your mortgage. You can do some minor calculations to determine how much of a deduction you may receive. Look at it as instead of getting a $1 tax break for every one spent in interest, you get back only one penny for every dollar. Let’s break it down:
Suppose you have spent $12,000 in interest on your mortgage. In your tax bracket, the value of standard deduction is 35%. That would put your value of mortgage deduction at $4,200. If you are filing under a single status that would mean that your standard deduction would be $5,800 which is only worth $2,975 in lowered tax payments.
If you think those numbers are bad, if you are a part of the lower tax bracket, it is certain that your deductions will be much lower. In other words, your mortgage rate tax deduction will only increase if your income starts at approximately $90,000 a year. With that being said, it is obvious that the majority of taxpayers that have their own homes do not benefit from mortgage rate tax deductions at all.
Here’s a Better Option
A wiser option than paying interest on a mortgage with little or no benefit come tax time is to pay straight cash for your new home. It may be difficult and seemingly impossible to do so, but with plenty of hard work and determination put forth in saving money, the deed can be successfully done. Paying with straight cash will eliminate the need to pay interest on any mortgage and will completely erase the chances of being drawn into homeownership by mortgage rate tax deduction. If cash is not an option for you, your second best option is to pay off the house as quickly as possible. That way, you avoid making interests payments on a long-term basis.
In conclusion, mortgage rate tax deductions may sound like a great aspect of owning a home, but the deductions are not as attractive as they seem. Read over this article again or conduct your own research to find out if mortgage rate tax deductions will benefit you or not.