It’s one or the other: You cannot take both the standard deduction and itemized deductions like mortgage interest. Itemized deductions therefore aren’t worth anything unless they total more than the standard deduction, and then their true value is limited to the amount by which they exceed the standard deduction.
In fact, the standard deduction is so large that two-thirds of taxpayers don’t bother to itemize, and hence get nothing out of any mortgage interest deduction for which they are eligible.
In the example, the homeowners can claim $16,400 in mortgage interest if they itemize. Assuming they are a married couple filing jointly, they could get $11,400 in a standard deduction. Mortgage interest therefore increases their deduction by only $5,000, saving them just $1,250 in taxes. (For simplicity, this assumes no other itemized deductions.)
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Because the standard deduction is the same for everyone, regardless of income, it’s a bigger factor for people with lower incomes and less-expensive homes.
Imagine a couple in the 15 % tax bracket with a $200,000 mortgage. They’d pay about $10,900 in interest in the first year, saving $1,640 in tax if they itemized. But by claiming the $11,400 standard deduction instead, they could get a bigger tax saving, $1,710. For this couple, the mortgage interest deduction is worthless.
Most tax-preparation software like TurboTax (Stock Quote: INTU) guides the user through calculations to determine whether to itemize or take the standard deduction. There also are a number of online calculators which can be found by typing “itemize or standard deduction calculator” into your search tool.
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