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?
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Wow, great post…Putting a firm number on the tax advantage is an eye opener…
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.
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?
Your post is very informative. I am impressed with the layout of your article. Keep up the good work!
Thank you.
Barry
It’s a little bonus and that is all. But it beats renting if you can afford it. There’s appreciation most of the time and there’s also mortgage paydown. So those three things added up can be a decent number.
2009 Taxes´s last post:2 Important Changes in the Tax Law this Tax Season
take full tax advantage of your home, your taxes will likely get more complicated. In most cases, homeowners itemize. That means you’re not living on “EZ” Street anymore; you’ve moved to the 1040 long form and Schedule A, where you’ll have to detail your deductible expenses.
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