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I was wondering how much of a yearly tax payment could be deducted using the homeowners tax deduction. I know that the policy allows for a deduction of the interest payments amount for up to $750,000. So if the interest payment amount is higher than your income tax amount, is it possible to pay $0 income tax? What would actually happen?

To put some numbers to this:

Lets say a person earns $80,000 a year and their tax rate every year (lets say just income tax for this question) is around $20,000 a year. If the interest payments on the house are $20,000 a year, what would happen if this person opted to use the homeowner's deduction? Do they pay 0% income tax since $20,000 - $20,000 = 0?

This doesn't seem right. What would actually happen?

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    The mortgage interest deduction (part of itemized deductions) is deducted from your income, not the tax paid, so the person making $80K per year would have to be paying $80K in mortgage interest (plus any other itemizable things) in order to pay $0 income tax.
    – jamesqf
    Jul 15, 2019 at 19:16

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Nope it does not work like that, what you are referring to is a tax credit there are some but the interest rate deduction is a reduction of their income not taxes paid.

In your hypothetical case, their income would be 60K (80k-20k) and they would pay around 15K in taxes. Granted it is not as easy as that, but close enough for illustrative purposes.

There are things like the earned income tax credit, that if it did get as high as 20K, this hypothetical person would pay zero in taxes

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  • Basically the only savings when using this option, are the lower tax rate: 20k - 15k = 5k more in savings. Is that right?
    – Tyler .
    Jul 15, 2019 at 14:16
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    Its not quite that simple, but basically yes. In order to take the interest rate deduction you give up the standard deduction to itemize. Since the standard deduction was made very large, very few people can now deduct mortgage interest. In reality this person might save a 1k-2k on their taxes. It is just better to have a paid for house rather than a jumbo mortgage like you are describing.
    – Pete B.
    Jul 15, 2019 at 14:22

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