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The Taxing Side of Refinance

27
Aug

If you’ve refinanced lately, congratulations. You’ve undergone the tough scrutiny of a mortgage lender and have been rewarded with a lower monthly mortgage bill.

Come April, though, you may wonder if the hassle of refinancing was really worth it. That’s because shaving interest off your mortgage means you’ll take a smaller interest deduction when calculating your income tax.

Indeed, IRS stats show a sizable decline in the amount of mortgage interest Americans have deducted from their taxes since the housing boom of the past decade.

To avoid a nasty surprise, “Figure out what your tax liability will be with the new mortgage rate,” says Karl Fava, a Certified Public Accountant based in Dearborn, Mich.

For instance, Fava explains, if you are paying $3,600 less annually in mortgage interest and are in a 20-percent tax bracket, “you’ll be paying $720 more in income tax.” That’s because your taxable income can no longer be reduced by that $3,600, so you’ll pay a 20-percent tax on $3,600, or $720.

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