Your Home a Big Tax Break? Doubt It
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My clients often are surprised by how little that new home purchase actually saved them on their taxes. I’m not, but then, I understand what’s going on in that corner of the tax code (no one really understands the entirety of the tax code ;)).
Let me give you a very basic example (and you’d be surprised how many returns I filed that were about as complicated as this). First off, let set up a few simple givens:
- $80,000 in wages, Married Filing Jointly, no kids
- $150,000 home - the approximate average home prices here in the Midwest in January ‘05 - with 20% ($30,000) down just to keep it simple. So, a $120,000 mortgage.
- 30 year fixed @ 5.77% (the national average for January ‘05).
- First payment due January ‘05, giving tham a full first year racking up the greatest deductible interest they’ll have for the life of the mortgage. $8,422 in total payments, $6,884 in interest (give or take a quarter).
- Property taxes of $4,650 - a 3.1% rate. Again, national average (couldn’t find a breakdown by region, so national it’ll be)
- State taxes of $3,000 paid (just about right for the state I live in)
- Just to be generous, I’ll say they paid $500 for vehicle taxes & donated $2,000 - both additions to their itemized deductions, so they’d see even less of a benefit if they didn’t have ‘em (to the tune of around $375 less)…
Without the mortgage interest/real estate tax deduction:
$80,000 AGI
- $10,000 Standard Deduction
- $6,400 Exemption Deduction
——————————-
$63,600 in taxable income, and a federal tax bill of $9,236.
With the mortgage interest/real estate tax deduction:
$80,000 AGI
- $17,034 Itemized Deduction
- $6,400 Exemption Deduction
——————————-
$56,566 in taxable income, and a federal tax bill of $7,756.
Yielding a savings of $1,520, for the low, low price of just $11,534. Quite the bargain, eh? 
Financial Freedumb said,
Wrote on April 20, 2006 @ 4:26 pm
Wow, great post…Putting a firm number on the tax advantage is an eye opener…
Financial Freedumb - Sometimes it takes a little bit of dumb to achieve financial freedom. » Friday! Update: Home Tax Break, Smoking, and Panhandling 04.21.2006 said,
Wrote on July 27, 2006 @ 4:28 am
[...] I’m starting the process of purchasing a home, although I’m probably not going to become very serious until next year. I ran across a post that shed an interesting perspective on the tax advantages of home ownership. It’s something I was curious about for some time…take a look, it’s got good details. Which reminds, me congrats to SingleMa too and her home purchase! [...]
Should You Enroll in an Accelerated Mortgage Payment Plan? « Irregular Payments said,
Wrote on November 17, 2006 @ 5:09 pm
[...] With this month’s mortgage bill, we also received an offer to join our lender’s Accelerated Mortgage Payment Plan. Using it, they claim we can settle our 30-year mortgage seven years early while saving a sizable amount in interest payments. And indeed it would, as we would be paying half our payment bi-weekly - instead of once monthly like now - which is 13 full payments a year (52 weeks bi-weekly equals 26 half payments equals 13 full payments) instead of the normal twelve. That one extra full principal payment does wonders, especially early on when almost everything you pay is eaten up by interest. A little pain up front yields incredible returns later. (That is, if you consider not having a mortgage payment incredible returns. I, for one, do even though I know there are those of you out there who do so love that mortgage interest deduction.) [...]
Apparently I Feel Differently About Debt ... Irregular Payments said,
Wrote on June 5, 2007 @ 9:43 am
[...] If you are like most, and the only reason you qualify to itemize is because of mortgage interest, the ’savings’ is likely much less. Personally, we don’t see any advantage at all because we won’t itemize either [...]
Tax Rebate said,
Wrote on January 4, 2008 @ 9:34 am
I think the problem is that the government makes the tax coding and the tax system in general complicated so that people are ignorant on how to claim any refund back.
Finance news said,
Wrote on January 22, 2008 @ 7:23 am
Nice post, laying out the figures in an easy to understand manor.
The old saying ‘no such thing as a free lunch’ certainly rings true in this world usually.
Everything is structured so that you cant get anything for free, it really hacks me off! On the grand scale of things the saving isn’t really a big percentage is it?
Allen said,
Wrote on August 6, 2008 @ 5:33 pm
Your post is very informative. I am impressed with the layout of your article. Keep up the good work!
Thank you.
Barry