The new tax law has changed the math on mortgage interest for many American taxpayers. The tax law passed in late 2017 preserved the mortgage interest deduction. However, it also doubled the standard deduction and capped the amount of state and local taxes that can be deducted at $10,000. The relationship between these changes can make it advantageous for taxpayers to pay off their mortgage.
For example, a married couple that files jointly can claim a $24,000 standard deduction. Assuming their state income taxes and property taxes exceed $10,000 per year, they will be limited to a deduction of $10,000. That leaves $14,000 in itemized deductions, generally in the form of mortgage interest and/or charitable contributions, which must be made before any benefit will accrue to the taxpayers.
In other words, the taxpayers must pay out $14,000 before they get any benefit for paying mortgage interest. Those who do not have a large enough mortgage deduction to exceed this threshold get no federal tax benefit for having a mortgage. Those with a large mortgage may get some benefit but it will likely be very small compared to the overall cost of maintaining the mortgage.
Therefore, for many people the mortgage interest deduction may have little tax benefit. This can make paying down a mortgage an attractive financial plan-ing strategy as the taxpayer will save the interest costs without paying a large amount in additional income taxes. For example, paying off a mortgage with a 4.5% interest rate may be the equivalent of earning 4.5% tax-free on the money.