| |
Keep the mortgage or pay off the house?
|
|
|
|
In lower-priced areas, it gets
worse. Married taxpayers in Akron, Ohio, who
own a regional median-price house worth $110,200,
mortgaged with 20 percent equity, and who
are in the 25 percent tax bracket would receive
zero tax benefits from day one.
The picture changes dramatically
for a single homeowner with a house in San
Francisco, where the median price is $733,400.
In the first year of a home purchase, for
which he puts down 3 percent, the tax benefit
would be worth $17,632. If that homeowner
in the 33 percent tax bracket were to hold
on to his home for 30 years, the cumulative
deduction would be worth $444,403. A pretty
good deal.
Analyze your own situation using Dallas
Morning News reporter Scott
Burns' calculator. You may find that paying off your mortgage is a very smart
tax move, since you get the standard deduction no matter what.
Social
Security and taxes
If, after retirement, you will be relying on a
mix of Social Security and savings from an IRA or 401(k) for income,
reducing the number of pretax dollars you have to spend is startlingly important.
Social
Security benefits become taxable for a married couple filing jointly when one-half
of their total Social Security benefit added to all their other income is greater
than $32,000 -- or $25,000 for a single individual.
In 2007, a couple getting the
average Social Security benefit receives $20,556.
Half of that is $10,278. That means they can
withdraw about $19,500 from tax-advantaged
savings for a total income of $40,000 and
pay few, if any, federal taxes at all, in
part because Social Security remains tax free
and the couple gets extra standard deductions
for being older than 65.
In many parts of the country that's
a comfortable income -- particularly for people who own their home free and clear.
Add a mortgage to the equation and the picture changes significantly.
If
this couple has a monthly $1,000 mortgage payment and opts to pay it by pulling
savings out of a 401(k) or other tax-advantaged account, they'll
not only pay taxes on Social Security, they'll also be taxed on the money they
withdraw from their 401(k). Altogether, they would need to withdraw
$39,000 from the account to cover the extra mortgage payments and taxes, which
increases their tax bill from nearly zero to about $4,000.
If
this couple, who could otherwise live comfortably on $40,000, happens to withdraw
another $6,000 from their 401(k)s for a total of $45,000, then their
taxable Social Security and income will likely push them into the 25-percent tax
bracket, raising what they'll pay in taxes to about $5,700. |
