Tax Deductibility

Tax Deductibility (of Interest and Points)

The provision of the U.S. tax code that allows homeowners to deduct mortgage interest payments from income before computing taxes.

Points and origination fees are also deductible, but not lender fees expressed in dollars or any other settlement costs. Interest deductibility is politically untouchable in the U.S., although it is often criticized by economists and is found in few other countries.

Interest deductibility enters a number of decisions made by homeowners or purchasers, sometimes when it shouldn't.

Borrow for the Deduction? It never makes sense to borrow for the sole purpose of obtaining a tax deduction, even if you are in the highest tax bracket. If you are in the 40% bracket, for example, and you borrow $100,000 at 5%, you pay $500 of interest in month one and save $200 in taxes. Your net loss is $300.

If you invest the $100,000, the interest earnings reduce the loss. However, borrowing at 5% to invest does not become a profitable strategy unless you can earn more than 5% on the investment. Since this is not possible without incurring default risk, the required return on the investment must be above 5% plus an increment sufficient to compensate for this risk.

Assuming that the interest on investment is taxable, comparisons of mortgage rate with investment return can be made either before tax or after tax. For example, if the borrower in the 40% tax bracket would pay 5% on the mortgage and earn 4% on investment, the investment is a loser before tax (5% less 4%), or after tax (3% less 2.4%). If the investment is tax-exempt, however, its return should be compared with the after-tax cost of the mortgage.

Note that the very same principles hold when the issue is whether to invest in mortgage loan repayment, as opposed to acquiring some other type of investment. See Partial Prepayments (or Paying Off Early)/Making Extra Payments as an Investment.

Should Mortgage Insurance Also Be Deductible? The IRS is inconsistent in not allowing mortgage insurance premiums to be deducted in the same way as interest. See Private Mortgage Insurance/Why Aren't PMI Premiums Deductible?

References in periodicals archive ?
Some carriers believe the answer may lie in full tax deductibility of, for instance, premiums for people without employer-sponsored health insurance, while others favor some type of refundable tax credits for certain sectors.
he capital gains exclusions combined with the tax deductibility of mortgage interest and property taxes will continue to appeal to potential buyers.
The Portuguese Government has argued that its tax legislation is coherent in that there is a link between tax deductibility of contributions and taxation of pensions in case of Portuguese pension funds and between the non-tax deductibility of contributions and the non-taxation of pensions in case of foreign pension funds (similar to the coherence accepted by the Court in the Bachmann judgement (C-204/90).
Camp has also been active in support of the tax deductibility of long-term care insurance, Medicare payment for dialysis service, the House prescription drug task force and many other proposals to help the elderly and disabled we serve.
Religious institutions and all charities are granted two valuable benefits - tax exemption of their income and tax deductibility of their donors' gifts.
However, careful tax planning lets companies take advantage of exceptions to this rule to increase the tax deductibility of certain M&E expenses.
While Congress removed the federal government's subsidy of business lobbying by ending tax deductibility for businesses' lobbying expenses, it went much further with associations.
Beginning in the mid-'80s, members of Congress introduced legislation that would have prohibited tobacco advertising, limited it to "tombstone" messages (black text on a white background), or reduced its tax deductibility.
Finally, the bill raises the tax deductibility of health insurance for the self-employed from 30% to 40% in 1997 and up to 80% by the year 2006.
501 (c) (9), that type of letter did not address the tax deductibility of contributions to such a trust.
eliminating the tax deductibility of alcohol beverages as a business expense.
The only real carrot or stick the government has is to limit the tax deductibility of health insurance to those plans.