Mortgage Interest Deduction Limit and Income Phaseout
According to the IRS, the maximum mortgage amount you can claim interest on is $1,000,000 on first or second homes if the loan was taken after Oct 13, 1987. You can also deduct interest on $100,000 for a second mortgage loan used for anything other the purchase of your first or second home. More specifically, home equity debt means “any loan whose purpose is not to acquire, to construct, or substantially to improve a qualified home“. Interesting right? In other words, you can take a $100,000 home equity line of credit to buy a Porsche 911, an incredible home theater system, and do a little landscaping and all the interest is deductible! No wonder why everybody took out so many Home Equity Lines Of Credit (HELOC)!
You already know that the government is sexist because the maximum mortgage interest deduction limit stays at $1,000,000 even though both people could have $1,000,000 mortgages. It’s beyond me why the government thinks two people who want to marry with $1,000,000 mortgages each, don’t deserve to keep their deductions. But at any rate, just be aware that if you can afford such a mortgage, you might want to think of this crucial loss of deduction before you get married. With rates averaging 5%-6%, you could literally lose out on tens of thousands in interest deductions!
DON’T FORGET THE INCOME PHASEOUT KILLER TOO
If you have an adjusted gross income of over $166,800, your mortgage interest starts to get phased out. For every $100 of income over $166,800 you lose $3 of itemized deduction X 33.3% up to a maximum loss of 80 percent of your itemized deductions. Talk about another overly complicated rule the IRS/government has implemented.
Example: You make $266,800 and you have $50,000 in mortgage interest deductions. Take $266,800 – $166,800 = $100,000. Then take $100,000 X 3% = $3,000. Finally, take $3,000 X 33.3% = $999. You can now only deduct $49,001 ($50,000 – $999) from your income instead of originally $50,000.
Questions and conclusions you should have:
1) Where the hell did the government come up with $166,800 income limit as the start of the phaseout? Obama is targeting raising taxes on singles making over $200,000 and couples making over $250,000 (why not $400,000 since two couples making $200,000 = $400,000!?). Supposedly only 2% of Americans earn over $200,000, so I GUESS the target is somewhat reasonable, even though 45% of Americans pay no federal income taxes. But $166,800? Why not $150,000 or $162,300?
2) What is the point of multiplying by 1/3 after multiplying by 3% the income you make over $166,800? Beats the shit out of me! All one has to do is instead of multiply the “overage income” by 3% then by 33.3%, just multiply the overage income by 1% to get the SAME AMOUNT ($100,000 X 1% = $1,000)! You can see through this example how inefficient the government and our tax system is. They add one extra layer to complicate things. They are just waiting for you to mess up your taxes so they can get someone after you and charge you a penalty. Smart by them!
3) Why are the tax rules always changing? The reason is because there are always new politicians in office who need to push their agenda to show they aren’t useless tools. If all laws stayed the same, there would really be no need for such a large government. One year we will have $166,800, 3%, and 33.3% and the next year we could have $200,000 and 1%. We need to always be cognizant of the major tax laws.
4) The ideal income for maximum happiness is not far off of $200,000 a year. If you make $200,000, the government won’t persecute you, and you will only lose $331 in mortgage interest deduction as your income is $33,200 above the $166,800 phaseout cap. That’s not so bad. Unfortunately, you won’t be able to take advantage of the $1,000 Child Tax Credit, which completely phases out at $95,000.
5) The government wants you to be a homeowner. For all intents, providing up to $1,100,000 in mortgage indebtedness interest to deduct from your income is pretty generous since the median home price in America is around $200,000. It’s generally good to go with the government and take advantage of all its offerings, rather than go against the government. In this age of massive monetary stimulus, you should think about owning real assets and take on reasonable debt given inflation will inflate higher your assets and inflate away your debt.
MORTGAGE INTEREST DEDUCTION – BETTER THAN DIRT IN THE FACE
Being able to deduct our mortgage interest from our income is better than nothing. Most countries I know of, including Canada and the majority of countries in Asia and Europe do not allow mortgage interest deductions. Hence, all owners should be thankful, especially the ones who pay the highest marginal taxes of 33% and 35%…. well, not really, because 33-35% is ridiculous! The one thing that irks is the inconsistency of going from single to a couple. 1 + 1 = 2 = equality not 1 + 1 = 1.
Go with what the government wants you to do. It’s the path of leas resistance, and you’ll be much happier!
Recommended Actions For Increasing Your Real Estate Returns
* Refinance Your Mortgage: If you are a homeowner and you have not refinanced in the past year, I strongly suggest you check online to see the latest mortgage rates. Interest rates have been rising due to fear of QE coming to an end. I always check with Quicken Loans because they are fast, quick, and provide a no obligation real quote based on the input you provide. I recently refinanced to a 5/1 ARM for 2.625% in the Summer of 2012 after just refinancing in the fall of 2011 for 3.125% from 3.625%! I am now saving $4,000 a year in mortgage interest!
* Check Your Credit Score: Everybody needs to check their credit score once every six months given the risk of identity theft and the fact that 30% of credit scores have errors. For over a year, I thought I had a 790ish credit score and was fine, until my mortgage refinance bank on day 80 of my refinance told me they could not go through due to a $8 late payment by my tenants from two years ago! My credit score was hit by 110 points to 680 and I could not get the lowest rate! I had to spend an extra 10 days fixing my score by contacting the utility company to write a “Clear Credit Letter” to get the bank to follow through. Check your credit score for free at GoFreeCredit.com and protect yourself. BTW, the averaged credit score for a rejected mortgage applicant is 729!
* Get the best home insurance possible. In order for your property to grow in value you must protect your property from damage. Fires, floods, leaks happen all the time. If you have cut-rate insurance, you could very well pay way more than you should. Maintenance costs add up over time. I highly recommend USAA for all your property and auto insurance needs. USAA was founded in 1922 to serve our honorable servicemen and women and have since opened up to the public to provide the absolute best service and some of the best rates. Not only do I have my home insurance with USAA, I also have an umbrella policy as well as three CDs totaling roughly $500,000 with the company. I’ve been a client for over 20 years given my father served in Vietnam and I’m a huge fan.