How Does Paying Off a Mortgage Affect Your Taxes?
Hudson, NH Homeowner Looks for Advice
The interest paid on a mortgage is tax-deductible. When you pay off your mortgage, you will no longer be paying interest and will lose this tax deduction. This will make your taxes go up as a result of eliminating this mortgage interest deduction. Similarly, as you continue to pay your mortgage down over the years the amount of interest paid annually, and the tax deduction that goes along with it, will be reduced.
A homeowner in Hudson was considering paying off his mortgage in one lump sum. Concerned about the future implications on his taxes, he contacted the professionals at Merrimack Tax Associates.
Tax Write-Offs That You Will Lose When Paying Off a Mortgage
The deduction for your mortgage interest will immediately be lost when your mortgage is fully paid off. There are other write-offs that you might lose as well. If you had previously itemized deductions, versus taking the standard deduction, your deductions may no longer make sense to itemize with the loss of the mortgage interest. This means you will be left with the standard deduction, as itemizing will no longer be advantageous.
If the property is for investment purposes, paying off the mortgage will have a similar impact. You will no longer be able to deduct the mortgage interest. This means that you will end up making more profit on your investment, thereby increasing your tax payment.
Depending on your tax situation there are some instances where it makes sense to continue with a mortgage so that you can maintain the interest deduction. However, if your tax bill will go up less than the amount of interest paid, you will save money by paying off the mortgage and no longer owing in interest.
The Hudson homeowner met with the Merrimack Tax Associates team and now has a better understanding of how paying off his mortgage will affect his tax bill for years to come. Armed with this information, he can now confidently make a decision that is in his best financial interest.