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 ?
We therefore can provide no assurance that final amounts paid in settlement or otherwise, or associated costs, or the income tax deductibility of such payments, will not differ materially from our established reserve and assumptions related to income tax deductibility."
We wont remove tax deductibility for getting advice about tax compliance, but Labor will.
Reportedly, this case concerns the tax deductibility of the Stockmann internal interest payments after a change in Sweden's tax legislation at the start of 2013.
Along with major education, public safety, and realtor organizations, REBNY expressed deep concern about the adverse economic impacts that the elimination of state and local tax deductibility (SALT) would have on constituents and municipal services, especially education, public safety, and infrastructure across the country.
In some situations, full tax deductibility can be achieved.
House Bill 8657 also provides that any business or nonbusiness entity which shall undertake the effort of using recyclable and biodegradable materials for the packaging of consumer goods shall enjoy a tax deductibility privilege on its income tax to the extent of the proven cost of the recyclable or biodegrable material on its production process.
Slome noted that the tax deductibility only applies to traditional health-based policies.
Since home equity is a potential buffer against economic hardship after retirement, the focus of tax deductibility should shift from increasing the affordability of homeownership to inducing homeowners to build equity more quickly.
The new tax law calls for a careful consideration of how the benefits of the capex deductions and lower tax rate compare against the new caps on interest expense tax deductibility. As leverage goes up, the net impact of the tax reform may turn from positive to neutral and then negative.
In other words, the tax deductibility gave the parties a great deal of flexibility to settle their divorce issues to their mutual benefit.<br />Those benefits and that flexibility come to an end on Dec.
That's because their tax systems rely on income taxes, which could lose their federal tax deductibility under the congressional bill.
Neither the House nor Senate tax bill tampers with the tax deductibility of muni bond interest, which is the primary reason investors buy munis and state and local governments issue them.