How does the tax deduction work for mortgage interest payments?
Friday, March 19th, 2010 at
7:00 pm
Is this the correct formula for the tax deduction:
Tax rate of 38.5% times all the mortgage interest I paid in the past year?
Also, If I owe 0 in taxes but my deduction is 5 (based on formula above) does that mean the govt. will send me a check for ?
Like this post? Subscribe to my RSS feed and get loads more!
The mortgage interests you paid are deducted in your schedule A, Itemized deductions. So it will make any difference only if the total itemized deductions are more than the std deduction for your filing status. You can find more detailed discussion on this topic here. http://findtaxservice.com/component/option,com_smf/Itemid,29/topic,188.0/
Again, if you want to see how much tax you can save from the mortgage payments you can use this calculator.
http://findtaxservice.com/taxcalculator/mortgage-taxsavings-calculator.html
The top tax rate in the US is 35%, so I’m not sure where you’re getting the 38.5%. And the 35% rate doesn’t kick in for either single or married filing separately until your taxable income is $336,500 - if your income is really that high, you’ll probably get hit with the alternative minimum tax which would wipe out some of your deductions.
To figure what you’re really saving by itemizing, take your total itemized deductions and subtract your standard deduction of $5150 if filing single, $10,300 if married filing joint, and multiply the difference by your tax bracket, which is something less that .385.
This assumes that you are not subject to the AMT in which case your savings would be less.
To figure your refund, subtract your total tax from your total payments, which is usually your withholding amount unless you made quarterly payments.
I’m not sure where you got that formula. I’ve never heard of it. Let me tell you what I know. Mortgage interest is 100% deductible, meaning all of it is subtracted from your income and you don’t pay tax on it. However, if your standard deduction is MORE than what you paid in mortgage interest (plus any other deductions), then it wouldn’t make sense to itemize. You see, when it comes to taxes, you have a choice. You can itemize (meaning you can deduct mortgage interest amongst other things), or you can take your standard decuction. One or the other. You can’t do both. Whatever is most beneficial for you. The standard deduction for a single person is $5,150. The standard deduction for married filing joint is $10,300. For head of household it’s $7,150 (or somewhere near that amount). If you didn’t pay at least that much in mortgage interest (plus other itemizable dedutions), it wouldn’t make sense to itemize. Does that make sense? Good luck!
No to your last question. You get your interest payment from your mortgage company in January. Then that number goes in your Schedule B under interest deductions for your itemized deductions. It eventually does reduce your taxes but not as simple as you deduced.
no, not exactly. see the tax tables on irs.gov
mortgage interest gets deducted on Schedule A, assuming you itemize your deductions and do not use the standard deduction. the actual amount of the tax benefit depends on your tax bracket.
no, you wouldnt get a refund if your deduction is in excess of your tax liability. the deduction would reduce your liability to zero. you would not get a refund unless you made payments.