Tax Implications of Paying Off a Mortgage Early

by Emily Weller

Paying off a mortgage isn't a race, but working to pay it off sooner rather than later can mean a good deal of savings. One reason people hesitate to pay down their mortgages is because they think being mortgage-free will mean a considerably larger tax bill. Depending on the size of your mortgage and your income, your mortgage might have less of an impact on your taxes than you think.

Interest Deduction

One thing that makes having a mortgage slightly more appealing is the interest rate deduction on your tax return. Your mortgage is one of the only loans for which the IRS allows you to deduct the interest, as long as it meets certain conditions. For example, your total mortgage needs to be less than $1 million. Deducting your mortgage interest lowers your taxable income. The mortgage interest deduction isn't a credit, so it doesn't reduce your tax bill dollar for dollar.

Taking the Deduction

Depending on the amount of interest you pay each year, it might not be worth your while to claim the interest deduction. In 2012, the standard deduction for single filers is $5,800 and $11,600 for people who are married. If you have a low interest rate and a relatively small home loan, your mortgage interest might not top the standard deduction. Unless you claim other deductions on Schedule A, paying off your mortgage early might have no impact on your taxes.

Tax Savings

If you do itemize and deduct your mortgage interest, the actual tax savings might be lower than you expect it to be. People in higher tax brackets tend to save more on taxes over the long run than people in lower tax brackets. For example, suppose your adjusted gross income places you squarely in the 15 percent tax bracket. If you have a $300,000, 30-year mortgage with a 4.5 percent interest rate, over the course of the mortgage, you'll save $37,083.02 in taxes, or about $1,236.10 per year. But, if your income is high enough to place you in the 28 percent bracket, you'd save $69,221.64 over the course of 30 years.

Interest Savings

Depending on how quickly you pay off your mortgage, the amount you save in interest over the course of time is considerably more than the taxes you'll save. If you're able to pay $500 extra per month on your $300,000 30-year mortgage, you'll shave $107,914.77 off of the total bill. That amount is considerably higher than the taxes you'll save, regardless of your tax bracket.

About the Author

Based in Pennsylvania, Emily Weller has been writing professionally since 2007, when she began writing theater reviews Off-Off Broadway productions. Since then, she has written for TheNest, ModernMom and Rhode Island Home and Design magazine, among others. Weller attended CUNY/Brooklyn college and Temple University.

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