Tax deduction vs. low mortgage payment

Tax Talk by George Saenz • Bankrate.com

Dear Tax Talk,
We purchased a home one year ago in Phoenix for $250,000 on an acre.
One year later, we now have the opportunity to sell our home for
$530,000 (our model is now selling for this amount), and purchase a
one-half acre home for $325,000. I say sell, sell, sell and only have
a $45,000 mortgage left. My husband states that the tax deductions
would not be the same, even with three children. My way of looking at
it is, at age 34, we would almost be free of a home payment. What are
the pros and cons of not having a home payment each month? Thank you.
-- Elena

Dear Elena,
I'm with you, so get your husband to start packing his bags. The
deduction for home-mortgage interest only saves you taxes on a
fraction of the total payment. The objective of the deduction is to
encourage homeownership over renting, but it never makes sense to
incur a mortgage in excess of your lifestyle needs.

Mortgage interest is an itemized deduction. Itemized deductions are in
lieu of the standard deduction afforded to everyone. If you have
enough itemized deductions that exceed the standard, you save a
fraction of those deductions in taxes. That fraction depends on your
tax bracket, which varies between 15 percent and 35 percent, depending
on your taxable income. If you pay $1,000 a month in interest, and
your annual income is more than $325,000, the most the Internal
Revenue Service gives you back is $350. Whereas if you eliminate the
$1,000, you save $650.

Some itemized deductions cannot be eliminated, such as state and local
income taxes and property taxes. Some folks feel good making
charitable contributions and choose not to eliminate those; some folks
have high medical bills and employee business expenses that are
unavoidable. But if you can provide yourself with a $325,000 home that
is almost paid off, you don't have that outflow of the mortgage
payment every month, which is a bigger savings than the tax savings.
So the answer is revealed in this question: Whom do you want to make
richer -- yourself or the bank?

http://www.bankrate.com/nltrack/itax...20050708a1.asp


===
"To buy an island is the same as courting a woman. You can never explain exactly why you love her. It's chemistry--something you cannot define--a feeling that you can stay forever."
-- Farhad Vladi, Islands (mag) Jul/Aug 2005