Can I Write Off My Mortgage Interest in 2019? Or My Charitable Gifts?
Ever been told by a realtor that your mortgage interest is deductible? Think again. The same goes for charitable gifts. "You can write off your donation". Not quite. In this post, I want to show how difficult it actually is to get a "write-off" for these, and other types of "tax write-off items".
Note: Throughout this post, I will use the phrase "tax deductible" rather than "tax write off". Just keep reading...it will make sense.
For homeownership (where the interest paid is "deductible") and charitable-giving you have to exceed an established threshold before any of it becomes deductible on your taxes (deductible meaning lowers the amount of taxes you owe). In 2017 the threshold (called the standard deduction) was $6,350 if you were single ($12,700 if you were married). However, because of the Tax Cuts and Jobs Act, the standard deduction was almost doubled; now at $12,200 if you are single and $24,400 if you are married for tax-year 2019. So let's put some numbers to it and I'll show you how these ads as "tax deductible" are HIGHLY UNLIKELY!
Let's say you and your spouse take out a loan of $400,000 to buy your house and your interest rate is 5%. So your total interest payments in year 1 are $20,000 = ($400,000 x 5%). Then say you gave $4,000 throughout the year to churches and charities that are 501(c)(3)'s. In total that's $24,000 ($20,000 + $4,000). However, even though you paid a lot of money towards "tax deductible" items, you actually don't get to deduct ANY of it because you are below the $24,400 standard deduction threshold! And for any of my readers in cheaper states where homes are more like $250,000 instead of $400,000, this just makes you farther away from deducting anything.
Here's the other thing you have to consider: Even if you are able to exceed the standard deduction, the odds of you being able to get the full power of the deduction (I'll explain what this means in a minute) is super rare. Think of it this way: The first $24,400 of qualifying "tax deductible" items don't even count for you because if you did $0 worth of "deductible activity", you would still get to deduct $24,400 on your taxes (because it's given to everybody). So in terms of marginal benefit, you would have to get to $48,800 before it's fully deductible power even kicks in (first $24,400 is just getting to where you were already entitled to with the standard deduction, and the last $24,400 is allowing you to fully use your deduction)! A lot of households don't even make $48,800 as take home pay (meaning after your taxes are taken out of your paychecks). Your household may make 70,000 in gross (pre-tax) income, but that will only mean you take home about $50,000 after taxes. And I sure hope you aren’t forking out anywhere close to 100% of your entire take home pay towards tax deductible items. If you are, we should talk pronto.
So let me paint a picture for you of how hard it is to actually fully use the tax deduction; meaning get to $48,800 in "tax deductible" items for married couples. I'll use some of the common allowable tax deduction items in my example, but here is a solid list of common things that are "tax deductible" (subject to the standard deduction threshold I talked about above though).
Tax Deductible [potentially] items: Charitable Giving, Home Mortgage Interest, State and Local Taxes Paid, Medical Expenses in excess of 7.5% of your adjusted gross income, personal property taxes, theft losses.
Now for the example: In order to get the full 'tax deduction', you would have to have ALL OF THE FOLLOWING OCCUR IN ONE YEAR:
-Take out a $600,000 home loan (assumes 5% interest) -- so paying $30,000 in interest
-Give away $7,500 to qualifying, 501(c)(3) charitable organizations
-Pay $4,500 in property taxes on your home (assumes 0.75% property tax assessment per year on your $600,000 value home)
-Pay $6,795 in state taxes (assumes a $150,000 gross income for the household).
-Pay $10,000 in medical and dental expenses out of your pocket (and not including the premiums you pay for your insurance policy)
Even in Denver where I live (and it's expensive), this is barely anybody!! Again, if you live in a less-expensive state, it becomes even more unlikely! In fact, in 2018, only about 10% of households nationwide exceeded the standard deduction. Meaning that 90% of people didn't get to use ANY tax deductions, even though they might have given to charity or paid interest on their owned home or whatever other tax-deductible activities they participated in.
The reason I tell you all of this is a lot of people will try and push you to buy a home or give to an organization because it's a "tax write off". Don't be fooled! I'm not saying you shouldn't buy a house or give to a charitable organization if that's right for your situation. I believe everybody should be giving back a portion of their income, and it's a good thing that most people desire to live in a home that's theirs! But my point is that these marketing tactics and ads are super misleading!
Even for things such as contributing to a Traditional IRA, which some people say is "always" tax deductible (meaning it's not an item that is subject to the standard deduction threshold that's discussed above), that's not even always true! Did you know, if your household GROSS (pre-tax) income is over $123,000 if you're married or $74,000 if you're single, you can't even take a tax deduction for your contribution to your Traditional IRA (assuming you have a qualified retirement plan like a 401(K) at your workplace).
If you are wanting an unbiased, competent source of tax education and information that is coming from a CPA and tailored to your individual financial situation, I would invite you to book a discovery call with me as a financial coach at https://www.financiallyforgotten.com/contact or shoot us a message at firstname.lastname@example.org. The truth is, there is a lot of false information out there about taxes – and often coming from people trying to sell you something like a house (and touting incorrect tax information in the process). Our coaching rates are affordable and transparent and available for you to view at https://www.financiallyforgotten.com/pricing.