If you are considering purchasing a home or refinancing—you can go to quickenloans.com or lendingtree.com along with local mortgage lenders in your area—to determine what loan will best suit you—and your family. You can compare closing costs, APR's and Par rates to determine what loan will best serve your—and your family's long-term interests.
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For income tax preparation you can utilize the tax professional of your choice or you can choose among the following:
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 $197,544—the amount owed as of January 2011—this 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:
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 dollar—some 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 income—withheld 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 future—and as a result of purchasing a home in 2009—you 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—$11,300—which means you overpaid by $7,534—which 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 underpayment—and at the same time—minimize 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 situation—In 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.
OK—so let’s recap:
2010 Federal Refund after home purchase:
2010 GA State Refund after home purchase:
Total Refund: $12,987 "After Home Purchase"
2010 Federal Refund using the Standard Deduction:
2010 GA State Refund using the Standard Deduction:
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 year—or at any time in the future.
Remember that every home purchase is different and deductions, credits and other tax factors will be unique—so 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.
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