Tax Benefits To Being A Homeowner (The Good Old Days!)
I was looking for information on the tax benefit of being a home owner and came across an article about the tax benefits before the recent tax changes that are going into effect for 2018 and beyond. I was looking for the tax laws in place for 2018 but also realize many people are still filing their 2017 taxes. They are due by April 16, 2018. I decided it would be good to remind myself what the 2017 tax laws were and then next week look at what has changed going forward from 2018. So let’s talk taxes
Primary Residence Ownership Cost
Let’s assume you are a homeowner that bought a house for $250,000 dollars, and you paid 20% down and qualified for 30 yr loan with financing at 4.25%. This means you have a loan of $200,000. Your monthly payment to the bank would be $938.88. This would be a yearly payment of $11,806.56 of which $3371.72 is used to pay the principle down and $8434.84 is to pay interest on the loan. These numbers will change slightly as the years go by and you owe less on your house.
In addition to the monthly mortgage, a homeowner has to pay yearly insurance and property taxes. Let’s assume the yearly insurance $1200.00. Your yearly taxes are $6000.00. A summary of the cost would be as follows:
Yearly Mortgage Principle: $3371.72
Yearly Mortgage Interest: $8434.84
Yearly Property Tax: $6000.00
Yearly Insurance: $1200.00
Total yearly cost: $19006.56
Note: Sometimes you will hear the term P.I.T.I when people are talking about the cost of home ownership. The just means Principle, Interest, Tax (property), Insurance.
Home Ownership Cost and Impact on Federal Income Taxes
Utilizing the tax laws that were in place for 2017, the Mortgage Interest, and Property Taxes are tax deductible. What does this mean? When you fill out your income taxes , you fill out a schedule A form where you list the items that are to be deduced from your total income. The IRS allows you to deduct the Mortgage Interest and Property Taxes paid from your total income. This gives you a lower income that is taxed.
For example, if you made a gross income as reported o W-2 of 100,000 dollars, you would list this on your income tax forms. Then using the Schedule A , you would deduct $8434.84 for Mortgage Interest and $6000.00 for Property taxes. This would give you a taxable income of $100,000 – $8434.84 – $6000.00 = $85,565.16.
To calculate the income tax you would need to pay, you first need to look up your tax bracket. For a married person with Adjusted Gross Income of $85,565, the tax rate would be 25%. The income tax you would pay is therefore $85,565 * 0.25 = $21391. However, if you had to pay taxes on the full $100,000 income as reported on your W2, you would pay $100,000 * 0.25 = $25,000.
By being able to utilize the Mortgage Interest and Property Taxes to reduce your income tax from $25,000 to $21,391 reduces your income taxes by $25000 – $21391 = $3609. I made this a rather simple example but keep in mind that there are other restrictions in place as your income levels change and your personal tax situation changes. You may not be able to take the full deductions. See your accountant/tax advisor for your particular situation. The key takeaway from my example is that for the taxes you are filing this year most people will get a nice tax deduction as a result of home ownership.
Impact on Cost of Home Ownership
So how does this effect your overall cost of homeowner ship. Using the example outlined above. The cost of home ownership before considering income taxes was $19006.56. Your income tax that you needed to pay was reduced by $4042 dollars. The total cost of how ownership is then $19006 – $3609 = $15397. The yearly cost of home ownership is $15397. It is sometimes easier to think in terms of monthly cost. The monthly cost is $15397/12 = $1283. This is after the income tax deduction of $3609/12 = $301.
The tax benefit of being a homeowner is roughly $301 dollars a month for a person making $100,000 a year who owns a $250,000 dollar house with a $200,000 mortgage. Your particular situation depends on your income and P.I.T.I for your home.
Next week will we look at the same example but for utilizing the tax changes that have been put in place for 2018.