Tax deductions. We hear about them all the time and they are often advertised as a benefit of carrying a mortgage or student loan. But, do you actually come out ahead? As always, this post is not a “what to do” or “what not to do” post. Instead it is simply me sharing the results of a ton of reading, investigating and some basic math. For the sake of our discussion we will walk through an example using a student loan and one using a mortgage.

As of 2014 the US median household income was $51,939. Therefore, that will be our point of reference in our example. Okay, let’s say our family has $30,000 in student loan debt to go with their $51,939 income. Federal student loans allow you to deduct up to $2,500 per year in interest as a tax deduction. Very quickly let’s go over how a tax deduction works. A tax deduction allows you to deduct a specified amount from your taxable income. For example, if you have an income of $100,000 and you have a $10,000 tax deduction you will only pay taxes on $90,000. Got it? Good. Let’s return to our example. We will assume our family will get the maximum $2,500 deduction. If we subtract our $2,500 deduction we will only be taxed on $49,439. But, what is our actual savings? Well, a couple married filing jointly with an income of $51,939 will be in the 15% federal income tax bracket. Therefore, the tax deduction savings will be the difference in the taxes paid on $51,939 vs taxes paid on $49,439. Let’s to do math:

$51,939 x 15% = $7,790.85

$49,439 x 15% = $7,415.85

Using the calculations above you will see that our tax deduction saved us

In this example we will use a family that has a higher income and a mortgage. This time the family has a household income of $150,000 per year which places them in the top of the 25% federal income tax bracket. The family is in the first year of a $250,000 mortgage (The most interest is paid in the 1st year) at 4% interest. By the end of the year they will have paid ~$9,099.96 in interest if they had a 30 year mortgage. Using the tax deduction, their taxable income will become $140,900.04. Let’s see how much this tax deduction will save them.

$150,000 x 25% = $37,500

$140,900.04 x 25% = $35,225.01

In this example the math again does not work. This time, we sent the mortgage company

As of 2014 the US median household income was $51,939. Therefore, that will be our point of reference in our example. Okay, let’s say our family has $30,000 in student loan debt to go with their $51,939 income. Federal student loans allow you to deduct up to $2,500 per year in interest as a tax deduction. Very quickly let’s go over how a tax deduction works. A tax deduction allows you to deduct a specified amount from your taxable income. For example, if you have an income of $100,000 and you have a $10,000 tax deduction you will only pay taxes on $90,000. Got it? Good. Let’s return to our example. We will assume our family will get the maximum $2,500 deduction. If we subtract our $2,500 deduction we will only be taxed on $49,439. But, what is our actual savings? Well, a couple married filing jointly with an income of $51,939 will be in the 15% federal income tax bracket. Therefore, the tax deduction savings will be the difference in the taxes paid on $51,939 vs taxes paid on $49,439. Let’s to do math:

$51,939 x 15% = $7,790.85

$49,439 x 15% = $7,415.85

**Tax Savings = 7,790.85 – 7,415.85 = $375**Using the calculations above you will see that our tax deduction saved us

**$375**in taxes. In this example, we sent the student loan company**$2,500**in interest to avoid giving the government $375 in taxes. To make things worse, $2,500 is the maximum deduction. Therefore, even if you paid $10,000 in student loan interest you can only deduct $2,500. So the situation could be even more lopsided than our example! Hmmmm. Let’s try it again with bigger numbers and see if it changes the math.In this example we will use a family that has a higher income and a mortgage. This time the family has a household income of $150,000 per year which places them in the top of the 25% federal income tax bracket. The family is in the first year of a $250,000 mortgage (The most interest is paid in the 1st year) at 4% interest. By the end of the year they will have paid ~$9,099.96 in interest if they had a 30 year mortgage. Using the tax deduction, their taxable income will become $140,900.04. Let’s see how much this tax deduction will save them.

$150,000 x 25% = $37,500

$140,900.04 x 25% = $35,225.01

**Tax Savings = $37,500 – 35,225.01 =****$2,274.99**In this example the math again does not work. This time, we sent the mortgage company

**$9,099.96**in interest to avoid giving the government $2,274.99 in taxes! I should also note that in the United States we have a marginal income tax system. This means only the amount of money that exceeds the higher tax bracket is taxed at the higher amount (We will discuss this more at a later time). The point I am making is that the equations I have used overestimate the amount of income tax one would actually pay in these scenarios and the math is still abysmal.__Tax deductions are definitely something to utilize if they are available in your situation. However, they__**The take home message:**__a good reason to keep a mortgage or student loan around instead of paying them off. Something to think about.__**ARE NOT**