The US government has blessed us with the ability to deduct our mortgage interest expense from our income, thereby lowering our tax liability. If you go to Canada, Australia, Asia, and Europe, there is no such benefit. At least they’ve got cheap healthcare!
Given the US has a progressive tax system, the higher your income, the more valuable your mortgage interest income deduction. Homeownership with a mortgage is absolutely the best tax shield for everyday folks out there. I knew my income would rise over time and wanted to match the timing of my home purchase when I entered the 28% tax bracket.
Take a look at the latest marginal tax rates for singles and married couples.
Single Filing Status For 2016
- 10% on taxable income from $0 to $9,075, plus
- 15% on taxable income over $9,075 to $36,900, plus
- 25% on taxable income over $36,900 to $89,350, plus
- 28% on taxable income over $89,350 to $186,350, plus
- 33% on taxable income over $186,350 to $405,100, plus
- 35% on taxable income over $405,100 to $406,750, plus
- 39.6% on taxable income over $406,750.
Married Filing Jointly or Qualifying Widow(er) Filing Status For 2016
- 10% on taxable income from $0 to $18,150, plus
- 15% on taxable income over $18,150 to $73,800, plus
- 25% on taxable income over $73,800 to $148,850, plus
- 28% on taxable income over $148,850 to $226,850, plus
- 33% on taxable income over $226,850 to $405,100, plus
- 35% on taxable income over $405,100 to $457,600, plus
- 39.6% on taxable income over $457,600.
What’s important to note is that if you are in the top tax bracket, you get 39.6 cents back for every one dollar in interest you pay on your mortgage.
If you also pay State tax, you can see how your marginal tax rate can easily reach 45% on your last dollar of income earned! The beauty of the mortgage interest deduction is that it applies to your marginal income, and therefore your highest marginal tax rate.
For those in the 15% Federal tax bracket or below, I would not rush to buy a home. There are more costs to ownership that just a mortgage and property taxes and you’ll qualify for the standard deduction. When you’re in the 25% marginal tax bracket, that’s when homeownership starts making more sense provided you follow the 30/30 rule for home buying.
Here’s the proposed federal marginal income tax brackets for 2017 if Donald Trump does not make any changes.
And here is Donald Trump’s plan for reducing the top marginal tax bracket for those making over ~$400,000 a year to 33% from 39.6% while raising taxes from 28% to 33% for individuals making $112,500 – $190,150 a year.