One of the side benefits of homeownership is the right to claim various tax deductions, but it turns out that not all homeowners benefit equally.
A new study by the National Association of Home Builders concludes that the biggest benefits go to homeowners under 45, though it depends on the type of deduction.
For many homeowners, the biggest deduction is for mortgage interest payments. Pay $1,000 in interest and you will get $250 back, assuming you itemize your tax return and face a 25% income tax.
But this deduction shrinks over time as the homeowner gradually pays down the loan balance. On a $300,000 fixed rate loan at today’s average rate of about 4.4%, you’d pay about $13,100 in interest the first year, according to BankingMyWay's Mortgage Loan Calculator. That would save you $3,275 in taxes at the 25% rate.
But in the loan’s 20th year, interest would be just under $6,700, reducing the tax savings to $1,675 at the 25% rate. Your monthly payment would be just as large as when the loan was new but more of it would be going to pay down principal.
Using data from 2007, NAHB found the highest average interest deduction, just shy of $14,000, among people 35 to 45. The average deduction gradually declined to less than $10,000 for those over 65.
The study also found that 30% of all interest claimed was found in tax returns of 35 to 45-year olds, compared to 29% for taxpayers ages 45 to 55, 19% for those ages 55 to 65, 7% for those age 65 and older, and 15% for those ages 18 to 35. This is because a large percentage of young people rent or have inexpensive first homes, while many older people have no interest deduction because their mortgages are paid off.