Don’t believe everything you read

Warning - rant post ahead. Someone is wrong on the internet.

I love reading anything related to personal finance and Google has figured this out and put tons of personal finance related articles in my feed. Sadly, there is a common theme among the articles I read. Usually it’s something about little Americans have saved for retirement or ‘five tricks to save money’. Every once in a while, I come across an article that makes me mad - misrepresenting information to vilify someone/something. While I can't correct everything wrong on the internet, I'm going to dig into this article in the hopes that we'll all learn a little something but also as an example of why you should not believe everything you read.  .

“Surprise! The Mortgage Interest Deduction is now even more of a handout to the wealthy”

This article is about how under the new “Tax Cuts and Jobs Act” aka Trump’s tax plan, the rich will benefit more from the Mortgage Interest Deduction, implying that the rich are getting more benefits and middle class homeowners are losing benefits.

Before I rip into why this is practically lying, let’s define some terms. What is the Mortgage Interest Deduction? If you read my post on taxes, this deduction is one of those tax ‘discounts’, specifically one for people who bought a house and borrowed money from a bank (got a mortgage) to buy the house. If you borrowed money, you have to pay it back with interest and there is a special tax discount for paying mortgage interest.

We also need to understand the difference between “standard deduction” versus “itemized deductions”. When you file your taxes, the government assumes you qualify for some discounts but to make it easier they offer everyone a ‘standard’ discount, no proof or extra paperwork necessary. But, if you have a bunch of discounts that add up to more than the standard one, of course you are going to say ‘No thanks, let me list out all my discounts for you’ - you will opt to itemize your discounts. The standard deduction before this new tax law was $6,350 for those filing taxes as single and $12,700 for those married filing jointly.

The most common discounts folks use are the state and local tax (SALT) deduction and mortgage interest deduction. To give some concrete examples of these discounts, a single person making 50K a year in NYC might have state & local taxes of ~4K* in a year (NYC has one of the highest tax rates). A married couple making 100K total might have state & local taxes of ~9K a year. A $250,000 mortgage** at 4% interest, would amount to ~9K interest in the first year (the interest amount usually goes down every year after that). It’s easy to see with these numbers that it if you own a home and make a decent amount of money, it could be worth your while to itemize your deductions.

So what does this have to do with the new tax law? Well, the standard deduction amounts went up for everyone. This year, that amount is $12,000 for those filing taxes as single and $24,000 for married filing jointly. That means everyone gets a bigger discount. Yay!

Now to get down to why this article pisses me off... This article claims that a lot less middle-class folks are going to use the mortgage interest discount (totally true) going forward and the remaining folks that use it will be rich folks (‘cause you need a lot of mortgage interest for it to be bigger than the new higher standard deduction and only rich folks with expensive homes & mortgages will have that). BUT it fails to point out, the only reason the middle class folks won’t use the deduction is because they won’t NEED it anymore! The rich folks will get the same deduction as before, but middle-class folks will get a BIGGER deduction without even having to itemize.

Let me illustrate this with hard numbers. Last year, as a married couple, say your SALT came out to 9K and your mortgage interest was 8K, making your itemized deductions add up to 17K. Would you choose to take the standard $12,700 discount or a $17,000 discount? You’d take the $17,000 discount, no-brainer. This year, if you were given the choice between a $17,000 discount or a $24,000 discount - what are you going to choose? Did I mention that the $17,000 discount comes with more paperwork while the $24,000 discount is paperwork-free? Do you feel screwed here because you couldn’t take the mortgage interest deduction?

Note that this rant is *not* in defense of the new Trump tax plan. There are definitely some ways that folks will be worse off with this new tax plan. I have my opinions on that, but this post is not really about the tax plan.

Money matters can be complicated and it makes me mad when folks give you only bits and pieces of truth and then twist it to mislead you. When it comes to your money, no one is going to make sure you have all the information you need and in fact, people will exploit your lack of knowledge to try to take your money from you. Guard yourself with knowledge and don't believe everything you read.

* Everyone’s state & local tax situation is unique but for illustrative purposes, I used standard paycheck withholding amounts to come up with these numbers, using one allowance for single and two allowances for married. This example does not mean that if you are a single person making 50K a year that this the tax you should expect to pay.

* According to these mortgage statistics, the average new mortgage amount was 244K, so I rounded up to 250K.