Many people know that the interest paid on a mortgage is deductible on their income taxes. But they don't quite have an idea about the inner machinations.
It really is not all too difficult to understand how tax deductions work, and once you do, you should have a good enough estimate of the tax breaks you could take advantage of by being a mortgage-paying homeowner.
First, you need to know what is deductible. Most of the time, homeowners would be able to deduct from their income the amount of mortgage interest they had paid. They are also able to deduct the amount of real estate property taxes paid on the property.
For example, we have two individuals, one of them rents and the other one owns, and they both earn $60,000 per annum.
The renter pays $1,000 a month in rent and receives no tax benefits for renting a home.
The homeowner holds a $140,000 fixed rate mortgage with a 7% interest rate. He is paying a shade over $1,000 per month for his total mortgage. He pays $1,500 worth real estate property tax. His total mortgage interest paid for this tax year was $9,755.
This is where taxes will play a very big part in the equation. The owner is able to deduct $11,255 from his income before he calculates his tax liability. Poor Steve -- he is not able to deduct anything from his income, so he is taxed on $11,255 more income than John.
Let's keep it simple and assume that both are in a 25% tax bracket. The renter will owe the IRS $15,000 in taxes on his income of $60,000. As for John the lucky homeowner, his taxable income would now be $48,745 once you take away the aforementioned $11,255. He only owes $12,186 in income taxes. To wit, John would be saving $2,814 worth of taxes. That's a savings of $234 each month.
The man who owns a home would only be paying a shade under $900 (exactly $866) per month. As for Steve, he would still pay eleven hundred dollars. And when everything is said and done, John still is able to keep his house.
There are many variables that can affect the amount of mortgage interest you pay in any given year. It's a general rule of thumb, though, that you can shave off around 20% of your mortgage payment, give or take a few percent, to get an estimate of the money you can save as a homeowner.
Your lender should know more. A loan specialist with years of experience would not hesitate to give you a more accurate ballpark of your mortgage interest and tax payments for any given year or time frame within the life of loan. In addition, most lenders should furnish you with a schedule upon closing.
Ask your tax attorney or accountant for information regarding tax bracket and deductions and more detailed advice on those two topics. Your loan officer can't really help you with tax details.
The bottom line is that owning your own home has many financial advantages. If you are tired of spending your paycheck on rent, but getting nowhere, home ownership may prove to be a more affordable solution for you.
It really is not all too difficult to understand how tax deductions work, and once you do, you should have a good enough estimate of the tax breaks you could take advantage of by being a mortgage-paying homeowner.
First, you need to know what is deductible. Most of the time, homeowners would be able to deduct from their income the amount of mortgage interest they had paid. They are also able to deduct the amount of real estate property taxes paid on the property.
For example, we have two individuals, one of them rents and the other one owns, and they both earn $60,000 per annum.
The renter pays $1,000 a month in rent and receives no tax benefits for renting a home.
The homeowner holds a $140,000 fixed rate mortgage with a 7% interest rate. He is paying a shade over $1,000 per month for his total mortgage. He pays $1,500 worth real estate property tax. His total mortgage interest paid for this tax year was $9,755.
This is where taxes will play a very big part in the equation. The owner is able to deduct $11,255 from his income before he calculates his tax liability. Poor Steve -- he is not able to deduct anything from his income, so he is taxed on $11,255 more income than John.
Let's keep it simple and assume that both are in a 25% tax bracket. The renter will owe the IRS $15,000 in taxes on his income of $60,000. As for John the lucky homeowner, his taxable income would now be $48,745 once you take away the aforementioned $11,255. He only owes $12,186 in income taxes. To wit, John would be saving $2,814 worth of taxes. That's a savings of $234 each month.
The man who owns a home would only be paying a shade under $900 (exactly $866) per month. As for Steve, he would still pay eleven hundred dollars. And when everything is said and done, John still is able to keep his house.
There are many variables that can affect the amount of mortgage interest you pay in any given year. It's a general rule of thumb, though, that you can shave off around 20% of your mortgage payment, give or take a few percent, to get an estimate of the money you can save as a homeowner.
Your lender should know more. A loan specialist with years of experience would not hesitate to give you a more accurate ballpark of your mortgage interest and tax payments for any given year or time frame within the life of loan. In addition, most lenders should furnish you with a schedule upon closing.
Ask your tax attorney or accountant for information regarding tax bracket and deductions and more detailed advice on those two topics. Your loan officer can't really help you with tax details.
The bottom line is that owning your own home has many financial advantages. If you are tired of spending your paycheck on rent, but getting nowhere, home ownership may prove to be a more affordable solution for you.
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