Should I Pay Off My Home?

As a tax professional, this question is often asked by my clients. With the passing of the Tax Cuts and Jobs Act of 2017 and the first major overhaul to our tax code since 1986, I thought it might be helpful to take a new look at this old question.

One of the first things to consider when looking at paying off your home is where will the money to pay your home off be coming from.  In tax and financial speak there are two major types of assets: those that are considered pre-tax and those that are considered post-tax.  Pre-tax money, which is also known as “qualified“ or “before tax” money, would be funds on which you have not paid taxes on yet but will when you take a distribution.  The most common sources of pre-tax funds would be assets held inside 401(k)s, 403(b)s, 457(b) retirement plans and deductible traditional IRAs.  Post-tax money, also known as “non-qualified” or “after tax” money, are funds which you have likely already paid taxes on in part or in full. A few examples of post-tax funds would be checking accounts, savings accounts and investment brokerage accounts.  If you are pulling money from a post-tax source it will likely have less of an impact on your tax return or no impact at all.  If you are taking funds from a pre-tax source then it will definitely have a negative effect on your tax return because you will owe taxes on those funds you distribute.

Now that we have touched on where your money will be coming from we can look at the question of whether my home was helping me on my tax return as a deduction.  The tax law provides everyone regardless of filing status a standard deduction.  Here are the standard deductions for the previous 2 years and for the 2018 tax year:

Filing Status                      2016                        2017                      2018               

Married Filing Joint           $12,600                     $12,700                    $24,000

Head of Household           $9,300                       $9,350                     $18,000

Single                                 $6,300                       $6,350                     $12,000

If your itemized deductions do not exceed the above amounts for your filing status then you do not itemize on your return and instead use the standard deduction.  The itemized deduction form is called Schedule A and the 3 big items on that schedule are mortgage interest, property taxes and charitable contributions.  So if you don’t see a schedule A in your copy of your most recently filed return then chances are paying off your home would not reduce your deductions at all on your tax return moving forward since you are using the standard deduction.  If you are in this situation there are a few considerations you need to be aware. First, is if the money to pay the house off is coming from a pre-tax or post-tax source and the tax ramifications mentioned in the discussion above. Secondly, how much money will you need to pay off the loan?  Again, if pulling from post-tax source you will likely need to pull out less in comparison to a pre-tax source since you will owe taxes if the monies are coming from pre-tax funds.  Lastly, you will want to know the interest rate on the loan you are paying off in comparison with potential additional tax you may incur to distribute the funds to pay the home off.  If you pull out a large sum of money from a pre-tax account you are likely to push your income up into a higher tax bracket and actually end up paying more in tax on the money you distributed than interest you saved by paying off your loan!

If you do make a schedule A because your mortgage interest, property taxes (which will be capped at $10,000 max beginning in 2018) and charitable contributions exceed the above standard deductions then you will be reducing your deductions and likely owe more tax on a return as a result of paying off your home.  This does not mean that you should not pay off the home because there is the possibility that the money you would be saving in interest could exceed the value of the deduction on the tax return.  With the almost doubling of the standard deduction for each filing status from 2017 to 2018 the scales have heavily tipped in favor of paying off your home.

Just a final thought… It is difficult to put a price on peace of mind. If I were to suddenly come in to enough money to pay of my home, you would be hard pressed to convince me not to do it even if it was financially advantageous to continue to pay to get the deduction.  As you can see, there are a lot to consider when thinking about paying off your home and you should always consult a tax professional before making any decisions.

Joe Webb
Senior Tax Professional

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Should I Open an HSA?

Should I Open An HSA Account? Are you considering a Health Savings Account (HSA)? If so, it is vital to understand what exactly an HSA entails. With this guide, you'll learn all about it: the advantages of an HSA and how it can help you manage your medical expenses....

Personal Finance Tips for Young Adults

As someone who has been working for most of their life, I wish there was someone out there who had shown me the correct way to save money for my future. Now that I am in my 30s, I have been getting better at saving money, but there are some personal finance tips that...

How to Track Expenses

There are many different methodologies, tools, tips, and tricks for tracking expenses, and it ultimately depends on your lifestyle and how actively and accurately you want to track them. This is information I’ve pulled from other sources and compiled into a few...

How To Accurately Record Commuting Mileage and Increase Tax Deductions

Increase Tax Deductions With the Business-Mileage Rule Using the Business Mileage tax deduction can be tricky. There are lots of situations that count while others do not. We don’t like commuting mileage. You should dislike it, too. It’s personal. It’s not deductible....

Bookkeeping 101

As a new business owner, you will certainly have some responsibilities you won’t be able to avoid. One of those non-negotiable part of your business is producing financial statements. It can be overwhelming trying to master a topic such as bookkeeping but don’t worry...

Bankruptcy – Everything You Need to Know

Everything you need to know Filing for bankruptcy protection is considered a statement on your ability to repay your debt to your creditors. Filing for bankruptcy will also put a halt to foreclosure or legal actions against you, and it stops creditors from calling and...

Top Tax Tips for 2023

Tax Refunds May Be Smaller This Year Plan now to learn these 2023 tax tips avoid surprises in the future! If you’re expecting a tax refund in 2023, it may be smaller than last year, according to the IRS. Your annual balance is based on taxable income, calculated by...

What is an EA?

Have you ever seen the title EA next to a tax professional’s name and wonder what it means? Or maybe you’re familiar with the title and you’re curious about the differences between an EA and CPA? Either way, in this blog I will be answering these frequently asked...

History of Federal Income Tax Rates: 1913 – 2021

The United States federal government levies taxes on the income of its citizens and legal residents. The Internal Revenue Service (IRS) is the agency responsible for collecting these taxes.  Federal income tax rates have changed several times since 1913, when the...

Familiarize Yourself With Tax Terminology

Yes, I know, tax terminology feels like a whole new language. For most people all of tax forms can be even more confusing than a foreign language. What’s the difference between itemized deduction and standard deduction? What’s Income tax?  These words and more tax...

Request an Appointment Today

8 + 5 =

Call us at

Pin It on Pinterest

Share This