 Tax
deduction vs. low mortgage payment
|  Dear
Tax Talk,
We purchased a home one year ago in Phoenix for
$250,000 on an acre. One year later, we now have the opportunity to
sell our home for $530,000 (our model is now selling for this amount),
and purchase a one-half acre home for $325,000. I say sell, sell,
sell and only have a $45,000 mortgage left. My husband states that
the tax deductions would not be the same, even with three children.
My way of looking at it is, at age 34, we would almost be free of
a home payment. What are the pros and cons of not having a home payment
each month? Thank you. -- Elena
 Dear
Elena,
I'm with you, so get your husband to start packing his bags. The
deduction for home-mortgage interest only saves you taxes on a fraction
of the total payment. The objective of the deduction is to encourage
homeownership over renting, but it never makes sense to incur a
mortgage in excess of your lifestyle needs.
Mortgage interest is an itemized deduction. Itemized deductions
are in lieu of the standard deduction afforded to everyone. If you
have enough itemized deductions that exceed the standard, you save
a fraction of those deductions in taxes. That fraction depends on
your tax bracket, which varies between 15 percent and 35 percent,
depending on your taxable income. If you pay $1,000 a month in interest,
and your annual income is more than $325,000, the most the Internal
Revenue Service gives you back is $350. Whereas if you eliminate
the $1,000, you save $650.
Some itemized deductions cannot be eliminated, such as state and
local income taxes and property taxes. Some folks feel good making
charitable contributions and choose not to eliminate those; some
folks have high medical bills and employee business expenses that
are unavoidable. But if you can provide yourself with a $325,000
home that is almost paid off, you don't have that outflow of the
mortgage payment every month, which is a bigger savings than the
tax savings. So the answer is revealed in this question: Whom do
you want to make richer -- yourself or the bank?
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