retirement

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.

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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.

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