Tax Savings from Home Ownership
Most people understand that there are some tax savings that we enjoy by
owning our own homes. While this is true, it is not always as big of
savings as some Real Estate agents allow people to believe.
So what are those savings? They come in two forms: mortgage interest and property taxes.
But where the difficulty comes from is in the trade-off of tax preferences.
Most people who do not own their home with a mortgage take what is called the
Standard Deduction on their taxes. This is a set amount that we are allowed
to subtract from our income before calculating our tax liability.
The reasoning is that everyone has some tax deductible expenses and thus we are
allowed to make a deduction to cover that. If your deductions exceed the standard
allowed amount, then you can itemize those deductions and claim the larger amount.
Here are the Standard Deduction amounts:
|Head of Household
|Married Filing Joint
|Married Filing Separate
So while we gain some deductible expenses from owning our house, we forfeit the
Standard Deduction when we claim the itemized deductions. Therefore the savings
is based on the difference between the two.
Note also that this is a deduction from income before calculating your tax
liability. The amount of savings you experience is dependent upon which tax
bracket that you are in.
You should also realize that the entire house payment is not deductible. Only
the interest is deductible. (The assumption here is that we are addressing
your primary residence. Other rules apply to additional houses.) However, in the
early years of a mortgage most of the payment is for interest, so this difference
may not be significant.
The other item that is now deductible is the property tax. And once you are
itemizing deductions your state income tax payments are deductible as well.
Beware, however, that under AMT rules taxes paid are not deductible.
A number of other items are deductible as well - items unlreated to home ownership.
This includes excessive medical expenses, charitable contributions, employee expenses, etc.
We would be happy to work with you to determine your deduction opportunities.