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which is the better tax advantage? mortage debt or education loan debt?
Question : which is the better tax advantage? mortage debt or education loan debt?
I’m creating a debt reduction plan, and one of the questions I have is this: is it better (financially) to eliminate mortgage debt before educational loan debt? I want to pay the least amount of interest so I would think the higher interest rate (mortgage) is what I should pay. However, there are tax advantages to both mortgage debt and school loan debt, and I’m not sure if I would be missing out on better tax advantages by keeping mortgage debt until I have eliminated school loan debt.
Any advice is appreciated.
debt reduction loan
Best answer:
Answer by r_kav
You have to run the numbers both ways (make out 2 tax returns) to find the answer to this for your own particular situation.
The answer is comprised of how much you pay in interest plus how much you pay in taxes, each way.
If the interest rates are similar and if the total interest paid per year for education is $ 2,500 or less, and if your income qualifies you for the school loan interest adjustment, then education is the better debt to have. Why?
1) A lot of tax law depends on your Adjusted Gross Income. (AGI). Having a lower AGI helps with other things on your tax form (the 2% and 7.5% thresholds on Schedule A, Earned Income Tax Credit, Daycare Credit, IRA contribution limits, tons of stuff). Even though both lower your taxable income, eduactional debt lowers your AGI whereas mortgage interest does not.
2) Sometimes you don’t have enough items on Schedule A to use it, so you end up taking the standard deduction. If your standard deduction is $ 10,000 and everything else on the Schedule A adds up to $ 8,000, then the first $ 2,000 of mortgage interest saves you $ 0 in taxes.
These are basic thoughts. Like others have said, the only way to know for sure is to do your tax return both ways and compare the tax liability savings versus what you lose in interest. Thanks to the complicated system of taxation we have, there simply is no easy answer. A good first step would be to go back to your ’06 tax return and play with the numbers since the ’07 software isn’t yet available.