Too many people confuse the tax deductability of mortgage interest with being a huge benefit that one should keep.
You are always, always, **always** better off not to pay the interest in the first place, whether it is tax deductable or not.
Many people also ignore the fact that if you don't itemize, you still get the standard deduction even if you don't have a mortgage. This new standardized deduction will replace your itemized deduction making the loss of the deduction that much less noticable.
So do it, and congratulations!What are the tax benefits of being debt free (mortgage)?
First congrats! I cannot tell if you mean you will still have a mortgage or not. If not, even better!
As you know, credit card/car/consumer debts are not beneficial for tax purposes (no deductions). You are entitled to a mortgage interest deduction on Sch A - Itemized Deductions.
If you have paid off your mortgage, obviously this deduction goes away. Looking solely at income taxes, the amount you pay for taxes may actually increase since this deduction is no longer there. You are still way ahead when you consider paying $1 for interest for a 25 cent tax deduction still costs you 75 cents overall!
You can minimize this adverse tax consequence of being debt free (including no mortgage). You are permitted to deduct the greater of your schedule A itemized deductions or the standard deduction. For 2005 returns, the standard deduction is $10,000 for marrieds. So if your itemized deductions are higher than this, then you deduct the full amount. If they are less than $10,000, you still deduct $10,000.
Having total itemized deductions greater than your standard deduction becomes harder if you no longer have mortgage interest. However, you can do some simple tax planning to accomplish this goal every other year...by paying your property taxes in Jan of 2007 for 2006 and in December of 2007 for 2008. You will report twice the amount of taxes and increase the likelihood your itemized deductions are larger than the standard deduction. Other similar strategies would work (charitable contributions for example).
All in, consider that because you will still get at least the standard deduction then you really are not losing the tax benefit of the full mortgage interest lost deduction.
Finally, everyones situation is different. If you report more than $145,950 of adjusted gross income, then your itemized deductions have limited deductibility since you are deemed rich by the govt! Alt minimum taxes also impact people strangely.
The best part is you are tax free! Enjoy this...
Good luck and God bless
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