Don't Assume that Mortgage Interest Will Reduce Your Taxes

Mortgage interest will reduce my tax bill. This is one of the biggest myths in home ownership. It is a myth because it is misleading. Mortgage interest is only tax deductible if it exceeds the IRS standard deduction ($5350 for individuals in 2007, $10,700 for married couples that file jointly). If your mortgage interest is significantly below this amount, then you will receive no real tax benefit for that interest.

Typically, two types of mortgage payers fall into this category. If you buy your first home at the end of the year, you may not accumulate enough interest to exceed the standard deduction for the year. Also, if you are many years into your mortgage, your interest payments may decrease to a point where you do not exceed the standard deduction. The size of your mortgage will also factor into this equation. Larger mortgages carry higher interest payments and vice versa. Property taxes, state taxes, and charitable deductions can help boost your tax deduction beyond the standard deduction.

Ultimately, however, the only real benefit your receive is the amount of interest you pay beyond the standard deduction.