Tax Benefits of Home Ownership:
What Are The Tax Benefits of Purchasing A Home?

amazon.com/author/thomas-tj-underwood


SEARCH ATLANTA AREA HOMES

OTHER SEARCH OPTIONS

SITE SEARCH MAP     BOOK SERIES


Learn what others are saying about TheWealthIncreaser.com our latest blog (Created in 2014) by Clicking Here…


Purchase "The Wealth Increaser" Today...


Learn about "What is Inside" The Wealth Increaser...Our New Book...


Purchase HOME BUYER 411 The Smart Guide to Buying Your Home...

Purchase HOME SELLER 411 The Smart Guide to Selling Your Home...

Learn what is inside "The 3 Step Structured Approach to Managing Your Credit & Finances"

ATLANTA TAX PREPARATION SERVICES


LifeLock.com



Learn How "10 Steps To Improving Your Finances" Can Lead To Financial Success For You & Your Family...


If you are considering purchasing a home or refinancingyou can go to quickenloans.com or lendingtree.com along with local mortgage lenders in your areato determine what loan will best suit youand your family.  You can compare closing costs, APR's and Par rates to determine what loan will best serve yourand your family's long-term interests.


Shop on eBay----Shop on amazon.com----Purchase My New Book

Learn how to apply the— “Keys to Success”—in your life



Learn How Home Loan Amortization Works...



For income tax preparation you can utilize the tax professional of your choice or you can choose among the following:



www.HRBlock.com

www.1040Return.com

www.turbotax.intuit.com

www.onepricetaxes.com



TAX BENEFITS OF A HOME PURCHASE


A Common Tax Scenario



Let’s say you and your family are a middle aged family of four (husband—wife—2 kids age 10 and 12) with family household income of $70,000 annually$5,833 monthly


You purchased a home in November of 2009 for $220,000 ($20,000 Down Payment) and had a mortgage of $200,000.


Because monthly payments are made in arrears (payment is for the previous month not the current month) you would not have a monthly payment due until January of 2010.


By having only the points paid at closing, a month or two of taxes, a month or two of interest and PMI (2010 will be the last year to deduct PMI on your taxes unless Congress reauthorizes it) you would be better off claiming the Standard Deduction on your 2009 taxes because the standard deduction exceeded your schedule A deductions.





However, on your 2010 taxes you and your family would be in position to itemize and take advantage of your home purchase to gain some tax advantage.





With a mortgage for $200,000 at 6% for 30 years you would be looking at a monthly payment of $1,199 on the principle and interest$200 per month on property taxes and $75 per month on PMI (private mortgage insurance since you put less than 20% down).


Insurance and Home Owner Association (HOA) Dues are normally non-deductible on your federal taxes unless you are claiming an Office in the Home deduction.


The total of the principle and interest portion of the housing payment for Tax Year 2010 is $14,389 with $11,933 being applied toward interest (you can deduct interest on your taxes on schedule A) and $2,456 being applied toward principle (reduces the balance owed on the loan but is not deductible on your taxes).





$200,000 minus $2,456 equals $197,544the amount owed as of January 2011this is not the payoff amount however, as other fees are involved in the calculation if you wanted to pay the loan off.





The total of the Property Taxes for Tax Year 2010 is $2,400.


The Total for the PMI (2010 is the last year that you can deduct PMI) is $900.


Your monthly house payment would be $1,474 with monthly income of $5,833 which would give you a housing versus income ratio of 25.27% and a housing & debt versus income ratio of 30.86% ($1,474 housing payment plus $326 auto payment is your only debt).


Both of the above ratios are excellent for your income and home purchase as they are fairly conservative ratios.


You and your spouse had 15% of your income withheld from your income of $70,000 which totaled $10,500 at the federal level. 5% ($3,500) was withheld at the state level.




On schedule A for the tax year 2010 you would include:




  • Mortgage Interest of $11,933
  • Property Taxes of $2,400
  • PMI (Private Mortgage Insurance) of $900
  • Charitable Contributions
  • State Income Tax Withheld
  • Other Deductions to which you are entitled



For this discussion, after adding up all of your Schedule A deductions they total $32,905.


As of tax year 2010 you and your family would be entitled to four exemptions for a total of ($3,650 times 4) $14,600.


As of tax year 2010 you would be entitled to a Child Tax Credit of (2 times $1,000) $2,000.




What would your taxable income and 2010 refund be?




$70,000 income minus $32,905 itemized deductions minus $14,600 in exemptions equals:


$22,495 in Taxable Income


The tax on that amount is $2,534, however as mentioned above you are entitled to a child tax credit of $2,000 (a credit reduces the tax amount dollar for dollarsome are refundable and some are not).


Your total tax owed is now down to ($2,534 minus $2,000) $534.


Remember you had $10,500 or 15% of your $70,000 incomewithheld in taxes.


You and your family would also be eligible in 2010 for a making work pay credit of $800.


$10,500 plus the $800 credit would total $11,300.


$11,300 (in total payments to the IRS) minus the $534 (your total tax) would be $10,766 which would be the amount that you overpaid and you would be entitled to a refund of that amount under this scenario.





In contrast, had you not purchased the home in 2009 and continued to claim the “standard deduction” your refund would have been $7,534 which is a difference of $3,232 in favor of the "refund after home purchase."




Another way of looking at it is that you had to live somewhere anyway, the monthly payments may have been about the same, you planned on staying in the community in which you resided for many years in the futureand as a result of purchasing a home in 2009you were able to get an additional $3,232 on your federal tax refund for tax year 2010 as a result.


You are now a homeowner and you must be ready for all of the responsibilities that homeownership entails.





The standard deduction was calculated as follows:





$70,000 in income minus $11,400 (the standard deduction for those filing MFJ or married filing jointly) minus $14,600 (4 exemptions) equal $44,000 in taxable income.


The tax on $44,000 in income for tax year 2010 would be $5,766.


You would still be eligible for the child tax credit of $2,000.


Your total tax would now be $3,766.


Again you had $10,500 in federal withholdings plus you are entitled to the $800 making work pay credit which would make your total payments to the IRS$11,300which means you overpaid by $7,534which would be the amount of your refund.





Keep in mind that both refund amounts are too large from a purely financial planning point of view.





A better approach would be to determine your anticipated refund amount with your tax planner or CPA and adjust your W-4 exemption and receive an additional take home amount each pay period and invest or utilize it appropriately at that time as opposed to giving the IRS an interest free loan.


However, many of my past clients who were not natural savers have utilized the larger than recommended refund amounts to their benefit by planning trips, savings, and other financial maneuvers around the refund amount.


When I worked as a fee-only financial planner most of my clients usually were in a position to get a small refund of about $1,000 or so. By keeping the refund amount fairly low they were able to avoid tax penalties for underpaymentand at the same timeminimize giving the IRS an interest free loan.





Do what you feel best suits you and your families financial situation, but keep in mind that you should be pursuing a financial position where you don’t have to utilize a tax refund as a forced savings type of device.





As for your state tax refund situationIn Georgia the difference would be significant.




By purchasing a home in November of 2009 and itemizing (using schedule A) on your 2010 taxes your refund on your Georgia Income Tax Return would be $2,221.


On the other hand if you used the Georgia standard deduction amount on your 2010 taxes your refund would only be $421.


A difference of $1,800.





OKso let’s recap:





2010 Federal Refund after home purchase:

$10,766


2010 GA State Refund after home purchase:

$2,221





Total Refund: $12,987 "After Home Purchase"





2010 Federal Refund using the Standard Deduction:

$7,534


2010 GA State Refund using the Standard Deduction:

$421


Total Refund: $7,955 "Using Standard Deduction"





Total Difference is "$5,032 in additional refund" in Tax Year 2010 by purchasing a home for $220,000 based on your family and income situation listed above.





Also keep in mind that tax laws change frequently and deductions and credits that are available one tax year may not be available the next tax yearor at any time in the future.


Remember that every home purchase is different and deductions, credits and other tax factors will be uniqueso use the above purchase and tax situation as a guide only.


For more precise information about your unique situation consult competent CPA's and/or tax attorney's or other competent professionals.



About This Article:

 

The above article was written by Thomas (TJ) Underwood.   Thomas (TJ) Underwood is an active real estate broker in the state of Georgia and is the writer behind The Wealth Increaser, Home Buyer 411,  Home Seller 411, The 3 Step Structured Approach to Managing Your Finances, Managing & Improving Your Credit & Finances for this MILLENNIUM and CREDIT & FINANCE IMPROVEMENT MADE EASY—FREE GUIDE. 

He is the creator of TheWealthIncreaser.com where he regularly blogs about helping consumers improve their credit, finance and real estate pursuits in an intelligent, consistent and proactive manner.  He’s always looking for ways to make intelligent finance improvement happen for those who “sincerely desire” success in their future. 

You can contact him from a number of sources but the most direct way is to contact him through the contact us block that can be found at the bottom of this page. 

You can also get other highly relevant tips on "living your life more abundantly" and possibly earn revenue at the same time by linking to TheWealthIncreaser.com.


Shop on eBay----Shop on amazon.com----Purchase My New Book

Learn how to apply the— “Keys to Success”—in your life





Return to Top


Return From Tax Benefits Of Home Purchase to The Best Atlanta Real Estate Advice Home Page


 


Thomas (TJ) Underwood has been providing financial advice as a tax practitioner since the mid 1980’s and began his financial planning career (while earning a Bachelor of Science Degree in Business Administration/Finance/Marketing), in Detroit at Wayne State University.  From 2010 up to the present he continues to provide visitors timely personal finance and wealth building advice and articles—including real estate advice—on 3 sites that he has created since 2010. 

Even though he is an active real estate Broker in the Atlanta Metropolitan area, he continues to blog consistently to help visitors and those who desire lasting financial and life changing success the opportunity to change their life for the better in a more efficient way. 

You can learn more about him and gain access to all three sites that he has created by going to Who is the creator of TheWealthIncreaser.com page.







Free Website Submission Free Search Engine Submission Free Google Submission Free Url Submission


Contact Us

Please note that all fields followed by an asterisk must be filled in.

Please enter the word that you see below.

  


Copyright® 2002-2018 the-best-atlanta-real-estate-advice.com