The other day I received a question from Tyler who was wondering why consumers are concerned about refinancing into lower interest rates when they don’t have to pay mortgage interest. Tyler explained that he thought all mortgage interest was tax deductible and reduced the amount of taxes you paid.
Unfortunately, the reality of tax deductions is they reduce your taxable income, or the amount of income subject to income taxes, not the amount of taxes you actually pay to Uncle Sam. Let’s say you make $100,000 annually and you paid $20,000 in mortgage interest. Because of the $20,000 you paid in mortgage interest, you can reduce your taxable income to $80,000. If you are in the 28% tax bracket, you will see approximately $5,600 in tax savings (28% of $20,000 = $5,600), not the entire $20,000.
Unfortunately, the reality of tax deductions is they reduce your taxable income, or the amount of income subject to income taxes, not the amount of taxes you actually pay to Uncle Sam. Let’s say you make $100,000 annually and you paid $20,000 in mortgage interest. Because of the $20,000 you paid in mortgage interest, you can reduce your taxable income to $80,000. If you are in the 28% tax bracket, you will see approximately $5,600 in tax savings (28% of $20,000 = $5,600), not the entire $20,000.
Thanks again Tyler for your question. As always, the forum is open to all questions and comments. Feel free to use me as a financial resource.
Thursday’s post will answer the refinance portion of Tyler’s question. We will discuss why a person may choose not to refinance and a few reasons people do not have the ability to refinance.
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