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
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$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?
