OK, I will be talking about the IRS for the next few minutes, so I am going to have to ask you all to get rid of your logical hats and put on your mathematical hats instead.If you've a calculator handy, I will steer you through some of the arithmetic of the tax code, but , if you want a logical reason, you'll have to ask somebody else, maybe a politician. Here are the true tax benefits when buying Merritt Island homes for sale.
Let's say you and your other half are living in a leased studio, and you are on the fence about whether or not to take the next step and get a house. So you draw up a listing of the pros and cons, homeownership vs. Hiring. And the list ends up looking like a tied score, so you are still uncertain, and then your crazy Uncle Joe tells you you'd be a fool not to buy a house due to the tax advantages. So you write down "tax advantages" on the "pro" side of the list, but you are also savvy enough to ask your Uncle Joe exactly what that comprises.
"Well," he is saying "as if it's obvious ""you get to subtract your property taxes and interest from your taxable revenue. Say your property taxes are $2,000 a year and your monthly home loan payment is $1,500, that is $18,000 a year, add that to the $2,000 taxes and you are saving $20,000 a year. It's like that is $20,000 you didn't earn. Regard it as the govt. giving you a $20,000 check each year purely for owning a home."
OK, slow down. Good as this sounds, you've learned to take everything your Uncle Joe asserts with a pinch of salt. So take care you have a salt shaker convenient while we take your Uncle Joe's maths apart.
First off, he is correct that you can deduct your real estate taxes and interest, but you will notice that he included your entire home loan payment in his equation, when in reality only the interest is deductible. Let's imagine only 1/2 your monthly payment "or $750 "is interest, which is $9,000 a year, add that to the $2,000 taxes, and Uncle Joe's $20,000 deduction is now reduced to $11,000.
Are you with me so far? OK, get the salt out again.
Next, after correcting his mathematics, your Uncle Joe is still telling you that your $11,000 tax reduction is a gift from the government, when in truth it isn't. It is the amount that you're allowed to take from your taxable earnings. So let's say you have a taxable income of $50,000, the top tier of which is taxed at 25 percent, including both state and Fed taxes. What your $11,000 reduction does is scale back your taxable income from $50,000 to $39,000, saving you $2,750 in taxes (25% of $11,000).
OK, hold that thought. Do you still have the salt convenient?
So now you ask your Uncle Joe how you actually take this deduction when you file your taxes.
"Well," he'll tell you, "you simply itemize your discounts on your Program A, then you enter the total on the second page of your 1040, then you take it from your taxable income."
OK, salt please.
What he's forgetting to tell you is that you continue to have the choice of NOT filing Schedule A. If you decide to NOT file Schedule A, you can instead take the "Standard Deduction," which differs from year to year, but this year it's $11,400 for a married couple filing jointly. At your revenue level and in your tax bracket, that Standard Deduction would cut your taxes by $2,850. Hence in the example we've given, you're actually $100 far better off if you don't itemise on Schedule A, that means there isn't any difference between leasing and owning.
So , I'm pleased that you had the salt handy, but you may remember I also suggested employing a calculator. Your earnings and tax rate figures are potentially wildly different than in my example, and you'll have to check with your loan officer for correct local estimates of real estate taxes and debt payments.
Plus there are more things you can itemise on Schedule A, so your total itemized deductions will probably be higher than just the taxes and interest. Your accountant can better estimate these deductions, and how much they might provide benefits to you, in your individual case. Once your total itemized rebates cross that $11,400 mark, then the system begins to work in your favor.
Now,. Don't get me wrong, there are loads of real reasons why home ownership is better than renting. But today's low rates have placed more householders in the position of having no tax advantage . More and more, it is smart NOT to file Schedule An as the Standard Deduction offers a larger taxation break.
So please do the math first before you write "tax advantages" on the "pro" side of your scoresheet.
Let's say you and your other half are living in a leased studio, and you are on the fence about whether or not to take the next step and get a house. So you draw up a listing of the pros and cons, homeownership vs. Hiring. And the list ends up looking like a tied score, so you are still uncertain, and then your crazy Uncle Joe tells you you'd be a fool not to buy a house due to the tax advantages. So you write down "tax advantages" on the "pro" side of the list, but you are also savvy enough to ask your Uncle Joe exactly what that comprises.
"Well," he is saying "as if it's obvious ""you get to subtract your property taxes and interest from your taxable revenue. Say your property taxes are $2,000 a year and your monthly home loan payment is $1,500, that is $18,000 a year, add that to the $2,000 taxes and you are saving $20,000 a year. It's like that is $20,000 you didn't earn. Regard it as the govt. giving you a $20,000 check each year purely for owning a home."
OK, slow down. Good as this sounds, you've learned to take everything your Uncle Joe asserts with a pinch of salt. So take care you have a salt shaker convenient while we take your Uncle Joe's maths apart.
First off, he is correct that you can deduct your real estate taxes and interest, but you will notice that he included your entire home loan payment in his equation, when in reality only the interest is deductible. Let's imagine only 1/2 your monthly payment "or $750 "is interest, which is $9,000 a year, add that to the $2,000 taxes, and Uncle Joe's $20,000 deduction is now reduced to $11,000.
Are you with me so far? OK, get the salt out again.
Next, after correcting his mathematics, your Uncle Joe is still telling you that your $11,000 tax reduction is a gift from the government, when in truth it isn't. It is the amount that you're allowed to take from your taxable earnings. So let's say you have a taxable income of $50,000, the top tier of which is taxed at 25 percent, including both state and Fed taxes. What your $11,000 reduction does is scale back your taxable income from $50,000 to $39,000, saving you $2,750 in taxes (25% of $11,000).
OK, hold that thought. Do you still have the salt convenient?
So now you ask your Uncle Joe how you actually take this deduction when you file your taxes.
"Well," he'll tell you, "you simply itemize your discounts on your Program A, then you enter the total on the second page of your 1040, then you take it from your taxable income."
OK, salt please.
What he's forgetting to tell you is that you continue to have the choice of NOT filing Schedule A. If you decide to NOT file Schedule A, you can instead take the "Standard Deduction," which differs from year to year, but this year it's $11,400 for a married couple filing jointly. At your revenue level and in your tax bracket, that Standard Deduction would cut your taxes by $2,850. Hence in the example we've given, you're actually $100 far better off if you don't itemise on Schedule A, that means there isn't any difference between leasing and owning.
So , I'm pleased that you had the salt handy, but you may remember I also suggested employing a calculator. Your earnings and tax rate figures are potentially wildly different than in my example, and you'll have to check with your loan officer for correct local estimates of real estate taxes and debt payments.
Plus there are more things you can itemise on Schedule A, so your total itemized deductions will probably be higher than just the taxes and interest. Your accountant can better estimate these deductions, and how much they might provide benefits to you, in your individual case. Once your total itemized rebates cross that $11,400 mark, then the system begins to work in your favor.
Now,. Don't get me wrong, there are loads of real reasons why home ownership is better than renting. But today's low rates have placed more householders in the position of having no tax advantage . More and more, it is smart NOT to file Schedule An as the Standard Deduction offers a larger taxation break.
So please do the math first before you write "tax advantages" on the "pro" side of your scoresheet.
About the Author:
Article written by Losten G. Gerchova a Cocoa Beach real estate agent. You can find out more about eh tax benefits of owning a home on Losten's Cocoa real estate website.
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