DOES IT MAKE SENSE TO PAY DOWN YOUR MORTGAGE?
Effective with the 2018 tax year, the Tax Cut and Jobs Act (ACT) reduced the allowable deductions for individual taxpayers who itemized their deductions on Schedule A. While that is true, one also needs to focus on the increased standard deduction.
The ACT, effective for the 2018 tax year, increases the standard deduction to $12,000 for single taxpayers and $24,000 for married couples filing a joint tax return (MFJ).
For this exercise, let’s focus on MFJ returns. In 2017, the standard deduction was $12,700. If a married couple had itemized deductions that exceeded the standard deduction of $12,700, they would itemize their tax deductions on their 2017 Form 1040.
Looking at the increase in the standard deduction, MFJ returns that have less than $24,000 of itemized deductions in 2018 (taxes capped at $10,000, mortgage interest, & charitable deductions) would claim the standard deduction rather than itemize.
If your itemized tax deductions had included mortgage interest, you may have carried this debt realizing that you were entitled to claim the mortgage interest as an itemized tax deduction. If you will now claim the standard deduction, you will no longer receive a tax benefit for these interest payments.
You now need to ask yourself, assuming you have the funds available to pay down your mortgage balance, “Am I better off from a tax perspective using funds in a low-interest bearing account to pay down my mortgage?” For example, if your funds are sitting in a money market account paying 1.5% interest and your mortgage rate is 4%, perhaps it makes economic sense to use those money market funds to pay down the mortgage.
It is also important to have a minimum of six months of emergency funds available in liquid assets. If you are thinking of paying down your mortgage, you should also inquire about getting a home equity line of credit (HELOC) so that you can tap into the equity in your residence if an emergency occurs.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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