How Tax Deductions Work

How Tax Deductions Work
Many people know that the​ interest paid on​ a​ mortgage is​ deductible on​ their income taxes .​
But they don't understand how it​ really works.
When you​ understand the​ way a​ tax deduction works,​ you​ should be able to​ estimate the​ amount of​ tax relief you​ would receive from owning your own home and paying a​ mortgage.
First,​ you​ need to​ know what is​ deductible .​
In many cases,​ homeowners are allowed to​ deduct the​ amount of​ mortgage interest paid from their income .​
They are also able to​ deduct the​ amount of​ real estate property taxes paid on​ the​ property.
For example,​ we have a​ homeowner and a​ renter who both make the​ same annual income of​ $60,​000.
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 .​
His total mortgage payment is​ $1,​100 a​ month .​
He pays $1,​500 in​ real estate property taxes .​
His total mortgage interest paid for this tax year was $9,​755.
Here's where the​ taxes make a​ difference .​
The owner is​ able to​ deduct $11,​255 from his income before he calculates his tax liability .​
The renter has no deduction from his income and is​ taxed on​ $11,​255 more than the​ owner.
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 .​
The owner's taxable income has been reduced to​ $48,​745 after his deductions .​
He only owes $12,​186 in​ income taxes .​
The owner saves $2,​814 in​ taxes each year .​
That's a​ savings of​ $234 each month.
Basically,​ the​ homeowner's after-tax monthly payment is​ actually $866 .​
The renter is​ still paying $1,​000 .​
The homeowner gets to​ keep his house in​ the​ end.
There are many variables that can affect the​ amount of​ mortgage interest you​ pay in​ any given year .​
But,​ you​ could often say that you​ can take 20% off of​ your mortgage payment to​ get a​ rough idea of​ the​ tax benefits of​ owning.
Ask your lender .​
a​ good loan officer should be able to​ give you​ a​ reasonable estimate of​ your mortgage interest and tax payments over a​ given period of​ time .​
Many lenders will give you​ a​ schedule when you​ close on​ your home.
When it​ comes to​ determining your tax bracket and deductions,​ ask your CPA or​ tax attorney for advice .​
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 nowher,​ home ownership may prove to​ be a​ more affordable solution for you.

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