Dave Denniston, CFA – daviddenniston.com

We’re talking with Dave Denniston, physician focused financial advisor and he reveals 7 Secrets to Reducing Taxes for Doctors, including:

  • Why contributing to your employer sponsored retirement plan is essential and how much that will save you in taxes
  • What overlooked strategy many hospital employed docs miss out on
  • Why utilizing your HSA plan is a no brainer
  • How having 1099 income in addition to your employment income can result in great tax deductions

Josh Mettle: Hello and welcome to the Physician Financial Success Podcast. My name is Josh Mettle, and this is the podcast dedicated to advising physicians how to avoid financial landmines. Today, we’ll be talking with Dave Denniston, a physician-focused financial advisor and author from Bloomington, Minnesota. Dave’s self-described passion is to help his clients eliminate debt and reduce their tremendous tax burden, and that’s exactly what we’re going to talk about today. Dave, welcome to the show! We are excited to have you.

David Denniston: Well, thank you so much for having me, Josh. This will be fun.

Josh Mettle: It will be fun. I was telling you before we started the podcast here that as I was reading your workbook, I was getting excited for this, so let’s jump right in if we can.

David Denniston: Let’s do it.

Josh Mettle: The first question I have for you is when I was reading a little bit about your story, you told the story of your daughter – am I saying her name correctly? Is it Evangeline?

David Denniston: Evangeline, close enough.

Josh Mettle: Evangeline, okay. All right. Thank you for your forgiveness there. Evangeline’s birth and how that kind of dramatic experience eventually lead you to be passionate about serving physicians. Would you just recap that for us? I love that story.

David Denniston: Yeah, you bet. About two and a half years ago, my wife and I had our second daughter, and it was just such an incredible trying time for us and our family. My wife with our first daughter had toxemia, preeclampsia, and the docs thought, “Oh, it’s probably not going to come back again.” It came back again with the second pregnancy seven years later with just a vengeance. My wife was having, by about 20 weeks’ gestationally, halfway through the dang thing, she was having horrible headaches and her blood pressure was way up, and so she got hospitalized.

They were telling us she might have to be in the hospital for the whole remainder of the pregnancy and things just got progressively worse. We were told time and time again, “Oh, it can’t be toxemia. It can’t be toxemia.” Lo and behold, finally at 23 weeks’ gestation, it showed up officially in the exams, and so, here we were in the hospital. My oldest daughter, who was 6 at the time, I had to explain the situation to her that they’re going to have to take out her baby sister, and she may not make it, and…

Josh Mettle: Wow.

David Denniston: Having that conversation was so hard, but the residents, and the fellows, and the neonatologists were just awesome in walking through the process. One thing that stuck out to me as they told us we’re going to have to take her out and tears just kind of rolling down my face. Being an analytical guy that I am, how much of a chance does she have?

They said, “Well less than 40 percent, but in her case, it’s either all or nothing.” Luckily, she came out 23 weeks gestationally. She was born less than a pound, 12 ounces and change. It was just a life changing event. I was there in the operating room the whole time, and we were in the NICU for five months afterwards until her adjusted birth date of September.

Within there in the hospital for five months, I got to know a lot of the residents and fellows and docs, and thought about who my current clients are. I said, “You know what, I could really help these people. I want to be able to give back.” That’s part of the reason I’m here today is just to help give back and give great information in the stuff that I love and know and passionate about and that’s stocks, bonds, mutual funds, taxes, insurance, and all that stuff.

Josh Mettle: Man, I am telling you that is a powerful story. I mean the story of her being born at 12 ounces. My wife, we have two young children, almost 5 and just turned 3 daughter, and she had natural births in both of those children. You see a woman for 12, 13 hours go through natural birth, and it’s a trying, emotional, tear shed kind of experience but pales in comparison to that story of yours. That is such a powerful story, and I love the way you got into this business. Thanks for sharing that.

David Denniston: You’re welcome. You’re welcome. If you can imagine, you go home without your child. That was the hardest thing for my wife.

Josh Mettle: I can’t imagine. I cannot take myself there as a parent, man, but I’m grateful that you and your family are safe. That is super cool.

David Denniston: Yes. She is doing great now. That’s awesome news. Here we are two years later, she’s healthy, defying all the odds. She’s catching up on everything, so it’s awesome.

Josh Mettle: She’s a miracle baby.

David Denniston: Yes, sir.

Josh Mettle: All right, buddy, well today we are going to review one of your workbooks. You’ve authored a couple of workbooks, and this one is titled Seven Secrets to Reducing Taxes for Doctors. But before we jump into the Seven Secrets, can you give us just a brief overview of the first chapter titled How the Tax System Works because I think most people in America could not explain that with any sort of accuracy, and talk a little bit about the general trajectory of tax rates over the last few years, and put on your Nostradamus hat and tell us where they’re going in the future?

David Denniston: Well that it is a great, great question, Josh, and first I just want to say we only have so much time so I could spend probably three hours on a seminar on this topic. We’re just going to try and condense it, do a 30-minute overview on all this stuff. If people want more information for your listeners, I’m more than happy to give them this whole book for free at doctorsachieveretirement.com, so make sure to check that out doctorsachieveretirement.com.

Let’s talk about taxes. There are basically three different kinds, all right, that most physicians need to be worried about: income taxes, payroll taxes, things like social security, Medicare, and capital gains taxes. Those are the three main kinds we’re going to be talking about a lot today. Income taxes are the kind people can control the most. Obviously, we all get paid, but there are ways that we can be proactive with those. We’ll touch out about that for a couple of minutes.

The second one is payroll taxes, social security taxes. This is the stuff that helps subsidize all the various programs like social security and Medicare and those are the hardest to adjust, although if you’re a business owner, there is some cool stuff that you can do there.

And then lastly, capital gains taxes. Those are actually completely under the control of the individual unless they are in mutual funds, so we’ll talk about that a little bit, too. Do you want me to start with income taxes a little bit, Josh, or?

Josh Mettle: Yeah. I love it. There’s so much here, but let’s start with income.

David Denniston: All right, so income tax is the first thing that I think people get messed up on when they look at the tax tables and you look at the rates is that you start getting taxed out of the gate. Well that’s not true. At a minimum, if you’re single, the first $9,000 of your income is actually income-tax free. If you’re married, it’s $18,000. If you’re a resident or fellow on the Federal level, you’re barely getting taxed at all because then you’re getting taxed at the next bracket – 10 percent after that.

Just think as a resident or a fellow, you are in a low tax bracket when you are there. When you are in practice, now this is when you’re getting hit. There’s all kinds of provisions people need to be aware of. Now income taxes, we’ll talk a little bit about later. I think, Josh, you want to talk about my five-step system‑

Josh Mettle: Yes.

David Denniston: That docs can do once they’re in practice, so we’ll talk about that. Payroll taxes, these are getting more expensive with the Affordable Care Act, so there’s two particular ways that your income tax as a doc once you’re in practice that you have to watch out for, and I want to make sure all of your listeners are aware of.

(1) It pushed up the top income tax bracket from 39 percent up to almost 40 percent, 39.6 percent. Just on Federal income taxes, not even including state, many physicians are pushing 40 percent on income at a given level. Below that, no. You want to make sure you are looking at these strategies because when you add in 5 percent per state, you’re pushing 45 percent.

(2) The second thing that physicians need to be aware of that the Affordable Care Act did was they added a 3.8 percent tax on the lesser of net investment income or excess of modified adjusted growth income if you’re over $250,000 if you’re married or $200,000 if you’re single.

Investment income is something we have to be really cautious of particularly when you have a two-doc household. A single-doc household may or may not. If you’re a surgeon, ophthalmologist, someone like that, you may be more subject to it. Also consider that the capital gains rates also increase because of the same thing, so you’ve got to be careful of this stuff.

Payroll taxes also came into effect there, too where the Affordable Care Act, again if you’re making over $250,000, there’s an additional Medicare tax of 0.9 percent if you’re married or if you’re making over $200,000 if you are single. Before, you were paying 15.3 percent in payroll taxes, now you’re paying 16.2 percent.

Josh Mettle: Wow. So that leads us to the next question, which is tell us where we’ve come, and you talk a little bit about things going up, but what do you see the trajectory of taxes headed over the next few years? It’s kind of a loaded question, but I’d love to hear your thoughts.

David Denniston: Yeah, yeah, yeah. No. I appreciate that. Basically if you look at the history, for the last 30 years, two things have come down: interest rates and taxes. We’re at the bottom of the cycle for both of these things, which I know you can relate to‑

Josh Mettle: That’s true.

David Denniston: On interest rates.

Josh Mettle: Absolutely.

David Denniston: Definitely people need to be looking into thinking about making sure that their mortgages have a low interest rates, and that they’re locked in and buy those homes that they have the ability, and (2) in relation to taxes, you can see this just happening over the last few years, this is likely to continue to increase with the various issues we have. (1) We’re getting close to election season. I want to encourage everyone get out there and vote. If you’re a doc, you are under attack. They are trying to change your Medicare reimbursements. They are going to be trying to change your income, so make sure you get out there and vote and make your voice heard.

We need to solve those huge government entitlement issues of social security and Medicare, but it’s pushing up ages, or increasing taxes, or having a cap on what millionaires can get from it or whatever. Whatever you stand for, whatever you believe in, you need to make your voice heard out there because as a doc, you will see your taxes go up if you keep silent.

Josh Mettle: Yeah. One side note, before we go into the five ways to reduce our income and therefore our income taxes, just quick out of curiosity, there is a cap at which you can no longer write off the interest on your primary or secondary residence. Do you know that number right off the top of your head?

David Denniston: I have to apologize. I don’t.

Josh Mettle: Yeah. I don’t need either, so you and I will figure that out after the show and then when we do the transcription of this, we’ll add it in. Nobody will ever know that we didn’t know…except for the listeners. But if they’re reading the transcription, we’ll add it in. All right, let’s move on. Let’s move in to the five ways to reduce our income, which is one of the chapters in your workbook. I’ll turn it over and let’s start with number 1.

David Denniston: Yes, so this strategy is something that many people are aware of, but they miss a couple of points, so number 1 this is basic. (1) You want to contribute to your employer-sponsored retirement plan, 401(k), 403(b), whatever that is and I have a simple mantra: pay yourself first. Everyone, if you’re listening, I want you to say this to yourself, “Pay yourself first.” This money comes right out of your paycheck. It’s withheld by employer. It doesn’t even see your tax return, and this is because the income reported on your tax return was adjusted by this kind of deductions.

At a minimum, I don’t care if you’re a resident or fellow or someone else, more than likely you can get free money just by participating. At a minimum, if you have a match in your 401(k), 403(b), you have to at least do that. Let’s say you put in at least $3,000. Your employer may match $1,500 or $3,000. You just got 50 percent or 100 percent return just for participating. You got to do that. You’ve got to do that.

Beyond that, consider that beyond that free return you just got, you get a tax deduction. Here we are just talking about taxes. Perhaps as a resident or a fellow, that’s not as important, but once you hit being a doc and practice, here we’re looking at 40 percent, 45 percent tax rates that a lot of docs are going to be paying, so you’re saving 45 percent, 50 percent of your money just by putting it in. The maximum for most physicians that are under 50 years old is $17,500. If you are over 50, that’s $23,000. Think about that for a second. If you are over 50 years old, you suck away $23,000. That is at least $8,600 that you are saving yourself in taxes today. It’s huge.

Step 1, you want to max out if you can or at least contribute to your 401(k) or 403(b).

Josh Mettle: Okay. Can I ‑

David Denniston: Yeah.

Josh Mettle: Get a real quick timeout. I want to just mention one more thing because you hit it, but I want to just make sure we put a spotlight on it. I believe that starting the investment process early in one’s professional career regardless of how small the amount is, is incredibly important to long-term investment success. And the reason I believe that is and you hit on a couple of good points, the money that they’re putting in early has very little – they’re not going to save as much in taxes as a resident as they would when they’re an attending, but if you didn’t invest and save, and you started it in your attending career, then you’d be comparing to a time when you’re at a 40 percent or 50 percent tax rate. It is important to get started early because you have such a low tax overhead at that point, number (1).

(2) The length of time for compounding makes up for the smaller amount that’s invested. Yes, it could be pitifully low in those first couple of years. It doesn’t matter. The miracle of compound interest will make that investment compound and be worth something significant 30 years down the road.

(3) You establish a habit, and this is one of the most important psychological things in my mind when it comes to investing. You can either measure your self-worth and you can measure how important you are psychologically by the massed things that you own – my cool car, my big house, and my really awesome backyard and swimming pool, or either that or all things that make me feel good, okay. You’ve got to understand that

That’s psychology. That’s how we compete as adults. But you can also get that same psychological return, that same charge, that same high by looking at what you have grown in terms of assets, and you can get to a point where you say, “I now get a charge from what I’ve been able to grow inside my retirement plan and inside my asset base that exceeds the charge that I would get by buying a fancy new car. But if you don’t get started, then you only get the charge from the fancy new car.

David Denniston: Yeah.

Josh Mettle: Starting young paves the path. The dollar amount does not matter. It was such an important point, and it’s something that I harp on all the time. I wanted to really just back you up with that and how important I believe that is.

David Denniston: Well, and consider that in your retirement plan that grows tax-deferred.

Josh Mettle: Right.

David Denniston: So it’s growing. There’s no consequence for doing it. The one thing I caution most people on is make sure you have a cash cushion. You want to have something to fall back on. I wouldn’t want to see someone have credit card debt. You need to work on your spending habits or something else. If you have 15 percent, 16 percent credit card debt, work on that first except for the employer match. You’ve got to take advantage of that.

Josh Mettle: Yeah. Okay, buddy. Let’s move to 2. I took away too much time.

David Denniston: No. It’s all good. Those are great points, and something everyone needs to consider. Point number 2, a lot of hospitals, this is a huge point that so many docs miss out on. If you are working for a hospital, more than likely I see this time after time after time, you probably have more than one retirement plan. You probably have two. I’ve seen this where a client has 401(k). They take advantage of that, and that’s great. But then, they also have a nonqualified 457 deferred compensation plan where you can tax deduct again another $17,500 or another $23,000.

Between the two retirement plans, you’re talking $16,000 worth of tax savings today by doing that. Make sure to check out your retirement plan options. Also if you’re self-employed, there are so many different things we can do: SEP IRAs, defined benefit plans, all kind of cool ways that you can get tax deductions.

The third part that a lot of people don’t do, which I really encourage them to do is contribute to a health savings account in HSA, and that’s for a whole family $6,500 that you can sock away there. And so, here you are getting stuff you’d normally be paying for after tax, and you’re putting in pre-tax dollars and that comes out tax-free. This doesn’t happen in the 401(k). This doesn’t happen in a traditional IRA. It doesn’t happen in a Roth. You get the tax deduction and it comes out tax-free. You’ve got to max it out, and in most cases, you can continue to accumulate and accumulate and accumulate so that when you do retire, you’ll have this possibly huge account that you can draw on tax-free for health expenses.

Josh Mettle: Great. Dave, do you know if you can invest that account or does it just sit stagnant?

David Denniston: It depends on the employer. It depends on the employer. In most cases, you invest it.

Josh Mettle: Interesting. Got it.

David Denniston: There are exceptions, but in most cases, you invest and most companies have HSAs now because it allows them to have a high deductible medical plan, so it’s something that’s going to be more and more of a trend and something more and more docs than anyone else really should take advantage of.

Josh Mettle: Yeah. We have one of those. I mean my wife and I would love it. Anytime we go in for something, we feel brilliant because we get to pay with it with pre-tax dollars for any kind of medical piece. But I didn’t think if you take that and invest that in some sort of like tax-free municipal bond or something like that where I can at least get a 4 or 5 percent rate of return or something like that, anyway so I’ll look more into that.

David Denniston: Let me catch you on that.

Josh Mettle: Yeah.

David Denniston: Do not invest in a non-taxable account, in a muni.

Josh Mettle: Oh!

David Denniston: That’s a no-no. Don’t do it!

Josh Mettle: Because it’s already tax free.

David Denniston: It’s already tax-free. Don’t do it.

Josh Mettle: Yeah, okay. That makes total sense. Makes total sense.

David Denniston: All right. We’ve got to get going here.

Josh Mettle: Okay.

David Denniston: Part 4, the next thing that I think a lot of docs need to look into particularly young residents, there are some really cool moonlighting opportunities to set up your own business. For example, if you go to Freelancephysician.com, I know the guy who founded it, Dr. Jennings Staley, good guy. I mean there are opportunities all across the nation for moonlighting where you get that 1099 income, and you’re getting paid $150 an hour or more. I know this is something our friend in common, Dr. James Dahle, does although he doesn’t it I don’t think through that website. But you can get great tax deductions and make money by doing something like that.

Josh Mettle: Great tip.

David Denniston: And then step 5 is all of the different business deductions that you can do and consider that the business owner doesn’t necessarily have to be you. It could be a spouse if you don’t want to do the moonlighting whether it’s writing off a car that you’re using for a business, taking a home office deduction, expense travel related to the business, buying a computer. All of this stuff and more can be tax deductible, so it’s something docs have to consider with as much money as they are making and this tax environment that’s likely to be getting worse in the future.

Josh Mettle: I love it. We could spend hours there. We’re going to move on. Thank you. Very good tips. I think you’ve done a great job for our listeners thus far regarding work-to-reduce payroll taxes and you’ve taught us to pay ourselves first. Killer lessons. Let’s move on to chapter 3. Would you briefly explain capital gains and how to manage them?

David Denniston: Yeah, yeah. You bet! Capital gains essentially you buy something and you sell it later. If you made money on it, that’s the capital gains. It doesn’t matter whether that’s a stock or a house. Of course, we know there are various exemptions for some of these things, but nonetheless if you buy an asset and it’s not in a retirement account, you get capital gains. Over my career, I’ve worked with a bunch of corporate people. Microsoft-ees and some of these folks who they ended up buying that stock or getting an award where it was one-third of the price that it is now, so it’s a huge capital gain decision.

Josh Mettle: Right.

David Denniston: Alternatively, you could potentially have a capital loss, which it’s getting to that time of the year, a lot of docs particularly if you’re in practice need to think about either harvesting your gains or your losses. Let me explain that just for a second. (1) You want to take a look at your tax returns, all right. All this stuff we’re talking about, you’ve got to review your tax return. I have stuff in the book, which will help you outline what you need to do, what you need to look at, which again you can get at doctorsachieveretirement.com for free, or you can buy on Amazon either way. But anyhow, what ends up happening is someone takes a look at their tax return. You want to say, “Do I have any carry-forward losses?”

Sometimes people work with poor advisors or made a poor decision or whatever where they have a whole bunch of capital losses. Again, some Microsoft-ees I work with, the opposite thing happened where they ended up getting a bunch of stock at the top of the tech boom, and Microsoft stock cratered after that. In one case, one gentleman I was working with had something like $200,000 of carried-forward losses because he can only write off $3,000 a year. Of course, the government doesn’t have any cap on what you can do on the upside, but on the downside, they only let you write off $3,000 a year.

This guy had $200,000 of losses. Every October or November, we would look at, “Okay, what are positions with gains that we can look to offset that loss?” Because we know at $3,000 a year, it’s going to take him 66 years plus to write that off every single year. We tried to work on that. Alternatively, you could look at harvesting your losses, meaning that if you have some positions that are losers, you could look to sell them because you have up to $3,000 a year that can offset your income taxes.

Second big point that people need to be aware of is the difference in taxes between long-term and short-term gains. You need to be very careful about this because your long-term capital gains tax is extremely cheap. As a resident, it’s practically nothing. You don’t have to pay much of anything on your capital gains, depending upon your income. In most cases, it’s very small. Now once you are in practice, now you could be paying 20 percent plus when you think of the Affordable Care tax.

As a resident, make sure you’re looking over if you’ve inherited some stocks from parents. This is something we’ve worked on with a few residents where they were blessed with that kind of deal. You want to spread out that capital gain rather than thinking of trying to sell it all at some point down the road.

If you really love the position, hey you can always buy it back, right? You don’t have to hold on to it forever. You can choose to be tax efficient with your money. There’s something in the book that people need to be aware of is how mutual funds can treat capital gains, there’s things called phantom capital gains that people should probably read the book to learn more.

Josh Mettle: What is that time barrier between long-term and short-term capital gains? Is that holding the asset for two years or longer?

David Denniston: Great question! One year. Only one year.

Josh Mettle: Only one year. Got it. All right, so with the time we have left, can you give us a brief overview of charitable contributions, and really Dave, any other common deduction strategies that our listeners should be employing to save on taxes that come to mind?

David Denniston: Yeah, absolutely. So charitable giving, if you own a home in my opinion and you’re in a state that you’re paying state income taxes in, or even if you don’t, you may have the ability to itemize your taxes. If you do, you need to be thinking about charity and charitable giving, in my opinion. (1) Hey, just give back! Do something good to help somebody out. Do something to help back the community. There is any number of ways that you can do this, whether it’s cash contributions or dropping off stuff to do goodwill. My wife and I do that just to clean out our closet and clean out our house with kids. You know how that goes.

Josh Mettle: Yeah. You’ve got‑

David Denniston: You’ve got to‑

Josh Mettle: Got rid of it.

David Denniston: Clean it out every so often, so as might well give a donation, right? I saw it on Craigslist. You’re probably not going to get a lot of money for it, so might as well get a tax deduction for it. Overall, people just need to make they’re keeping great records, contribute a cash or check. The other thing, which is huge, is you can also contribute property or an appreciated asset. I can’t overstate this enough. If I look at an example at the top of my mind again which is Microsoft stock, so if someone has for example Bill Gates, this is what he did. He established his own foundation, and then this Microsoft stock where the basis might have been $0.50 and worth billions of dollars, he put a whole bunch of that into his own foundation, and it was all a tax write-off.

Josh Mettle: Wow!

David Denniston: All of it.

Josh Mettle: So now he got to sell it from inside of the foundation with no capital gain?

David Denniston: It’s complicated but just know it doesn’t affect his personal taxes.

Josh Mettle: Got it.

David Denniston: So yes and no. But nonetheless, it gives you a tax write-off for your personal taxes. It’s a strategy that a lot of docs should be thinking about if they have appreciated assets. This is also something that older docs can do with required minimum distributions, which is an awesome strategy. Again you’ve got to read a little bit of the book to get that because I think we’re probably getting close to running out of time, but it’s something that a lot of people need to be aware of and think about whether or not it may apply to them.

Josh Mettle: Well, Dave, I appreciate your time. We’re right there. I always know it’s been a great show where I feel like we’ve snapped our fingers and here we are at the end of the show. But I want to give folks an opportunity to be able to find out more about you and of course get the workbook. but also find out more about the rest of the services that you offer because what you’ve put together on taxes is really, really quite remarkable in that it is very simple but very straight to the point and very effective, but you also have another workbook out. For folks who want to find out more about you and if you feel like it, please just tell us a little bit about the other workbooks that you have out and the services you offer and then how do folks reach you.

David Denniston: Yeah, you bet. Thanks, Josh. So I have written about five different workbooks, three are physician specific. We talked about the taxes one, but I have another one on debt. If you’re a resident or fellow or newly out of practice, I highly recommend that book. I talk about IBR versus PER, the Public Loan Forgiveness Program, as well as how do you decide which debt to pay off, so people definitely need to check that out especially residents, fellows, and young physicians or if you’re an older doc and then you have a kiddo going into medical school. It’s something that would be a great thing for them to learn, and I go to the same depths and the same meat we’re talking about here.

The second one was the insurance guide for physicians. I talk all about life insurance and disability income and making sure that people can’t get screwed over on having Cadillac policies and what to watch out for. I give multiple examples because I always try to put myself into someone else’s shoes in terms of what would I do if I were them. Those are all great resources.

Then lastly, you and I were chatting before that I have a book coming out, which is going to compile all of these different things with even more material that’s probably coming out maybe next year. Hopefully people might want to check that out and look for that as a resource and people can always reach me if they want help with their individual situation.

I’m always more than happy to meet with any resident or fellow for free. Existing docs, we can give you a discount on the normal services for being a listener here with Josh. You can reach me at dave@daviddenniston.com, D-A-V-E @ D-A-V-I-D D-E-N-N-I-S-T-O-N.com, or give me a call toll free (800) 548-1820.

Josh Mettle: Dave, thanks again. Well make sure and put those contact information right up on the podcast and it was a pleasure connecting with you. I just want to applaud you for the value that you are bringing to your clients, and beautiful story, and we look forward to connecting with you again soon.

David Denniston: Well, thanks so much, Josh. I just want to say thank you to those physicians that are listening for what they do. I just can’t thank the great physicians that helped us out enough, and I think often so many docs are overworked, they’re underappreciated for what they do, so thank you, doctors, for what you’re doing. Thank you, Josh, for making this available to them.

Josh Mettle: Man, well said, and you are very welcome. We’ll connect soon.

David Denniston: All right. Thanks, Josh.

Answers to unknown questions:

Regarding mortgage interest on primary and secondary residence, there is a phase-out of itemized deductions (which include mortgage interest) beginning with incomes of $254,200 or more ($305,050 for married couples filing jointly).  The limitation is calculated as follows:

Income over these amounts that is the lesser of (a) 3% of the adjusted gross income above the applicable amount or (b) 80% of the amount of the itemized deductions otherwise allowable.

So if a married couple has an AGI of $700,000 and mortgage interest of $5,000, property taxes of $6,000, and charitable contributions of $1,000 then the calculation is:

(A)  3% X ($700,000 – $305,050) = $11,849

Itemized deductions would be reduced by this amount.

(B) 80% X $12,000 (the amount of itemized deductions) = $9,600

Since $151 is the lesser amount, this would be their itemized deduction.  Does that make sense?

Upon the sale of a primary residence, a married couple filing jointly may exclude up to $500,000 of gain from income.  A single or married filing separate filer may exclude up to $250,000 of gain from income.

To qualify, one must have used the home as their personal residence for at least two of the five years prior to the sale.