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And an even better explanation:
The Tax Benefits of Home Ownership
by Celeste Marchand
Everyone knows that owning a home is the American dream, but did you know that borrowing to pay for one is a taxpayer's dream? Home mortgage interest is deductible on your income taxes if you itemize. You can deduct the interest on up to one million dollars of home mortgage debt, whether it is used to purchase a first or a second home. You can also deduct the interest on up to $100,000 of home equity debt, even if you don't use the money for home improvements. Real estate taxes are deductible as well. With the availability of these tax deductions, you should consider whether borrowing on a home is right for you.
What could the home mortgage deduction mean to you? What follows are some examples of the potential tax savings for several scenarios.
Example 1
Bob rents a home at a cost of $1,200.00 per month. He is single with no children and takes the standard deduction on his income taxes. His adjusted gross income is $128,000. He has $3,500 in state income tax withheld from his paychecks throughout the year, but doesn't qualify for any other itemized deductions. Bob's federal income tax liability for 2008 will look something like this:
Adjusted gross income $128,000
less standard deduction, Single $4,400
less personal exemption $2,800
Taxable income $120,800
Bob's 2008 federal income tax $32,129
However, if Bob purchases a home with a monthly mortgage payment of $1,200, his tax liability is lowered. At the end of the year Bob will receive a form 1098 from his mortgage company that shows how much of his mortgage payments for the year went to mortgage interest. Bob's 1098 for the year 2008 shows that he paid $11,400 in mortgage interest. Bob also paid $1,500 in real estate taxes on his home in 2008. Bob's federal income tax liability for 2008 will look something like this:
Adjusted gross income $128,000
less itemized deduction for state income taxes $3,500
less itemized deduction for real estate taxes $1,500
less itemized deduction for mortgage interest $11,400
less personal exemption $2,800
Taxable income $108,800
Bob's 2008 federal income tax $28,409
In this example Bob saves $3,720 in federal income taxes. In addition, his monthly housing cost stays the same and he owns his home, rather than renting. Good deal, Bob!
Example 2
Suppose there is another guy named Bob who is married and has two kids ages 16 and 19. This Bob has owned his home for a number of years. In fact, he has paid down his mortgage so much that his Form 1098 shows only $3,000 in mortgage interest paid in the year 2008. Bob's wife earns no income and they file their taxes married filing jointly. Bob's federal income tax liability for 2008 will look something like this:
Adjusted gross income $128,000
less itemized deduction for state income taxes $3,500
less itemized deduction for real estate taxes $1,500
less itemized deduction for mortgage interest $3,000
less personal exemptions for Bob, wife, and 2 kids $11,200
Taxable income $108,800
Bob's 2008 federal income tax $24,849
Bob is still itemizing because his deductions exceed the standard deduction, but just barely. The standard deduction for married filing jointly is $7,350 and the total of Bob's itemized deductions are $8,000. This saves Bob about $200 on his federal income tax in 2008.
Suppose that Bob and his wife decided to fix up their home a little bit in 2008. They also want to buy a new car, take a family vacation, and pay for their oldest child's college tuition. They've been saving for years and they could take $100,000 out of a mutual fund to pay for it all. But the mutual fund is earning an average of 10% interest a year so they decide to get a home equity loan for $100,000 at an interest rate of 8% instead. They are already ahead by borrowing for less than their money is earning, but look at what the $100,000 home equity loan does to their tax bill. Bob receives a Form 1098 that shows he paid $7,800 in interest on his home equity loan. Bob's federal income tax liability for 2008 will look something like this:
Adjusted gross income $128,000
less itemized deduction for state income taxes $3,500
less itemized deduction for real estate taxes $1,500
less itemized deduction for mortgage interest $3,000
less itemized deduction for home equity interest $7,800
less personal exemptions for Bob, wife, and 2 kids $11,200
Taxable income $101,000
Bob's 2008 federal income tax $22,580
Bob saves $2,269 on his federal income taxes by taking out a home equity loan!
Example 3
Suppose there is a third Bob out there. This Bob is single with no children and is paying the mortgage on the home he purchased a few years ago. Bob has been saving up and this year he fulfills his dream of purchasing a vacation home. It's not much, just a cabin in the woods, but it has a bedroom, bath, and kitchen. Here is what Bob's second home does to his tax liability for 2008:
Adjusted gross income $128,000
Less itemized deduction for state income taxes $3,500
Less itemized deduction for real estate taxes on 1st home $1,500
Less itemized deduction for mortgage interest on 1st home $7,800
Less itemized deduction for real estate taxes on 2nd home $1,100
Less itemized deduction for mortgage interest on 2nd home $10,200
Less personal exemption for Bob $2,800
Taxable income $101,100
Bob's 2008 federal income tax $26,022
The $1,100 Bob pays for real estate taxes on his 2nd home and the $10,200 he pays for mortgage interest on his 2nd home save Bob approximately $3,500 on his federal income taxes in 2008. Bob is so slick, fulfilling his dream of owning a 2nd home and saving money on his taxes!
The Tax Benefits of Home Ownership
by Celeste Marchand
Everyone knows that owning a home is the American dream, but did you know that borrowing to pay for one is a taxpayer's dream? Home mortgage interest is deductible on your income taxes if you itemize. You can deduct the interest on up to one million dollars of home mortgage debt, whether it is used to purchase a first or a second home. You can also deduct the interest on up to $100,000 of home equity debt, even if you don't use the money for home improvements. Real estate taxes are deductible as well. With the availability of these tax deductions, you should consider whether borrowing on a home is right for you.
What could the home mortgage deduction mean to you? What follows are some examples of the potential tax savings for several scenarios.
Example 1
Bob rents a home at a cost of $1,200.00 per month. He is single with no children and takes the standard deduction on his income taxes. His adjusted gross income is $128,000. He has $3,500 in state income tax withheld from his paychecks throughout the year, but doesn't qualify for any other itemized deductions. Bob's federal income tax liability for 2008 will look something like this:
Adjusted gross income $128,000
less standard deduction, Single $4,400
less personal exemption $2,800
Taxable income $120,800
Bob's 2008 federal income tax $32,129
However, if Bob purchases a home with a monthly mortgage payment of $1,200, his tax liability is lowered. At the end of the year Bob will receive a form 1098 from his mortgage company that shows how much of his mortgage payments for the year went to mortgage interest. Bob's 1098 for the year 2008 shows that he paid $11,400 in mortgage interest. Bob also paid $1,500 in real estate taxes on his home in 2008. Bob's federal income tax liability for 2008 will look something like this:
Adjusted gross income $128,000
less itemized deduction for state income taxes $3,500
less itemized deduction for real estate taxes $1,500
less itemized deduction for mortgage interest $11,400
less personal exemption $2,800
Taxable income $108,800
Bob's 2008 federal income tax $28,409
In this example Bob saves $3,720 in federal income taxes. In addition, his monthly housing cost stays the same and he owns his home, rather than renting. Good deal, Bob!
Example 2
Suppose there is another guy named Bob who is married and has two kids ages 16 and 19. This Bob has owned his home for a number of years. In fact, he has paid down his mortgage so much that his Form 1098 shows only $3,000 in mortgage interest paid in the year 2008. Bob's wife earns no income and they file their taxes married filing jointly. Bob's federal income tax liability for 2008 will look something like this:
Adjusted gross income $128,000
less itemized deduction for state income taxes $3,500
less itemized deduction for real estate taxes $1,500
less itemized deduction for mortgage interest $3,000
less personal exemptions for Bob, wife, and 2 kids $11,200
Taxable income $108,800
Bob's 2008 federal income tax $24,849
Bob is still itemizing because his deductions exceed the standard deduction, but just barely. The standard deduction for married filing jointly is $7,350 and the total of Bob's itemized deductions are $8,000. This saves Bob about $200 on his federal income tax in 2008.
Suppose that Bob and his wife decided to fix up their home a little bit in 2008. They also want to buy a new car, take a family vacation, and pay for their oldest child's college tuition. They've been saving for years and they could take $100,000 out of a mutual fund to pay for it all. But the mutual fund is earning an average of 10% interest a year so they decide to get a home equity loan for $100,000 at an interest rate of 8% instead. They are already ahead by borrowing for less than their money is earning, but look at what the $100,000 home equity loan does to their tax bill. Bob receives a Form 1098 that shows he paid $7,800 in interest on his home equity loan. Bob's federal income tax liability for 2008 will look something like this:
Adjusted gross income $128,000
less itemized deduction for state income taxes $3,500
less itemized deduction for real estate taxes $1,500
less itemized deduction for mortgage interest $3,000
less itemized deduction for home equity interest $7,800
less personal exemptions for Bob, wife, and 2 kids $11,200
Taxable income $101,000
Bob's 2008 federal income tax $22,580
Bob saves $2,269 on his federal income taxes by taking out a home equity loan!
Example 3
Suppose there is a third Bob out there. This Bob is single with no children and is paying the mortgage on the home he purchased a few years ago. Bob has been saving up and this year he fulfills his dream of purchasing a vacation home. It's not much, just a cabin in the woods, but it has a bedroom, bath, and kitchen. Here is what Bob's second home does to his tax liability for 2008:
Adjusted gross income $128,000
Less itemized deduction for state income taxes $3,500
Less itemized deduction for real estate taxes on 1st home $1,500
Less itemized deduction for mortgage interest on 1st home $7,800
Less itemized deduction for real estate taxes on 2nd home $1,100
Less itemized deduction for mortgage interest on 2nd home $10,200
Less personal exemption for Bob $2,800
Taxable income $101,100
Bob's 2008 federal income tax $26,022
The $1,100 Bob pays for real estate taxes on his 2nd home and the $10,200 he pays for mortgage interest on his 2nd home save Bob approximately $3,500 on his federal income taxes in 2008. Bob is so slick, fulfilling his dream of owning a 2nd home and saving money on his taxes!
So concrete is perfect.
