Interest paid on mortgage is a tax deductible figure -- this is common knowledge for most, if not all homeowners. But they don't understand how it really works.
What you would need to do in order to estimate how much of a tax break you can get for being a homeowner and paying your mortgage would be simple -- you must have a clear understanding of your tax deductions.
The first thing to find out would be what your deductibles are. In many cases, homeowners are allowed to deduct the amount of mortgage interest paid from their income. Another deductible figure for a homeowner would be the total amount of the real estate property taxes levied on the home.
Let us take this as an example -- John is a homeowner and Steve is a renter, and they both make $60,000 annually.
Steve pays a thousand dollars rent per month, but does not receive any tax benefits as a renter.
Whereas John holds a fixed rate mortgage worth $140,000 and the interest rate is at seven percent. His total mortgage payment is $1,100 a month. He pays $1,500 in real estate property taxes. And for the tax year to wit, his total mortgage interest was $9,755.
Here's where the taxes make a difference. By doing some simple calculations, we can glean that John can deduct $11,255 from his income before the tax liability is derived. The renter cannot deduct anything from his income, thus is charged a good eleven Gs more than the owner would be when taxes are calculated.
We wouldn't want to flummox you with complicated calculations, so let's assume both men are in the tax bracket of 25%. The renter, who, once again earns $60,000 per annum, will be charged $15,000 taxes by the IRS. The owner's taxable income has been reduced to $48,745 after his deductions. Therefore, he would only owe $12,186 worth of income tax for the fiscal year. The owner saves $2,814 in taxes each year. Or on a monthly basis, that's $234 -- not bad at all, eh?
Basically, the homeowner's after-tax monthly payment is actually $866. On the other hand, the renter will still be paying $1,100. The homeowner keeps his house, and everybody who lives in it remains happy.
Depending on the variables, you may be paying a different amount of mortgage interest each year throughout the life of loan. But if you want to keep things simple and get a ballpark figure of how much you can potentially save by being a homeowner, simply take off 20% from the total mortgage payment and you have a pretty good estimate.
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.
Ask your tax attorney or accountant for information regarding tax bracket and deductions and more detailed advice on those two topics. Your loan officer can't really help you with tax details.
As you can plainly see, there are several key advantages if you own your own home, and a lot of them can save you money. So if you've had it with paying rent and feeling as if you're running in place, you might want to run to those savings and own a home instead of renting one.
What you would need to do in order to estimate how much of a tax break you can get for being a homeowner and paying your mortgage would be simple -- you must have a clear understanding of your tax deductions.
The first thing to find out would be what your deductibles are. In many cases, homeowners are allowed to deduct the amount of mortgage interest paid from their income. Another deductible figure for a homeowner would be the total amount of the real estate property taxes levied on the home.
Let us take this as an example -- John is a homeowner and Steve is a renter, and they both make $60,000 annually.
Steve pays a thousand dollars rent per month, but does not receive any tax benefits as a renter.
Whereas John holds a fixed rate mortgage worth $140,000 and the interest rate is at seven percent. His total mortgage payment is $1,100 a month. He pays $1,500 in real estate property taxes. And for the tax year to wit, his total mortgage interest was $9,755.
Here's where the taxes make a difference. By doing some simple calculations, we can glean that John can deduct $11,255 from his income before the tax liability is derived. The renter cannot deduct anything from his income, thus is charged a good eleven Gs more than the owner would be when taxes are calculated.
We wouldn't want to flummox you with complicated calculations, so let's assume both men are in the tax bracket of 25%. The renter, who, once again earns $60,000 per annum, will be charged $15,000 taxes by the IRS. The owner's taxable income has been reduced to $48,745 after his deductions. Therefore, he would only owe $12,186 worth of income tax for the fiscal year. The owner saves $2,814 in taxes each year. Or on a monthly basis, that's $234 -- not bad at all, eh?
Basically, the homeowner's after-tax monthly payment is actually $866. On the other hand, the renter will still be paying $1,100. The homeowner keeps his house, and everybody who lives in it remains happy.
Depending on the variables, you may be paying a different amount of mortgage interest each year throughout the life of loan. But if you want to keep things simple and get a ballpark figure of how much you can potentially save by being a homeowner, simply take off 20% from the total mortgage payment and you have a pretty good estimate.
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.
Ask your tax attorney or accountant for information regarding tax bracket and deductions and more detailed advice on those two topics. Your loan officer can't really help you with tax details.
As you can plainly see, there are several key advantages if you own your own home, and a lot of them can save you money. So if you've had it with paying rent and feeling as if you're running in place, you might want to run to those savings and own a home instead of renting one.
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