Homeowners have AMAZING benefits that some realize and others don’t. The effect on your taxes can be large even though the credit is often little given 😉
ESPECIALLY as military members
Two Food for Thought Questions
Are you Married or Single?
Do you itemize or take the standard deductions?
If your answer was Itemize for the second question its most likely that you own a house. For MOST people the largest reason they itemize is due to your home! Per IRS rules you are allowed to itemize your mortgage interest and real estate taxes.
First lets take a step back and explain two things: being Single or Married and the different between itemizing versus standard deduction
Single or Married
Your “status” effects your standard deduction. While there is also widower and head of house hold for this article we are going to focus on single and married.
The standard deduction for singles is $6,200.
The standard deduction for married is 12,400.
In order for people to itemize there “tax benefit” has to exceed your natural ability to itemize.
Lets take a step back.
Standard Deduction means the IRS gives you $12,400 off your taxes “free”. So if you made 50,000 you are paying tax on $37,600 ($50,000-$12,400= $37,600).
Now on to the question do you Itemize or Standard Deduct
The question is: do you list one of the 13 ways one can deduct or do you just take your “standard deduction”.
This is where you HOUSE becomes a huge tax bonus! Per IRS guidelines you can deduct one’s mortgage interest and real estate tax as one of the 13 ways. These, for most people, are the largest “tie breakers” although some charitable donations could also be the reason to itemize. For many, charitable donations are just “extra” but the mortgage interest is the thing that really makes sense.
There is ONE large Elephant in the room that one needs to take notice!
In order for you homeownership to matter your itemization has to EXCEED the standard deduction.
So your probably thinking, Elizabeth, your speaking MUMBO JUMBO what the heck does this mean.
For simplicity it means your real estate taxes and mortgage insurance and mortgage interest have to EXCEED your standard deduction. (real estate taxes + insurance+ interest > standard deduction of $12,400 if married) If your calculation exceeds the standard deduction then you can itemize your expenses. This is where having exceptional record keeping skills pays off. Have a chat with your CPA to prime you on the receipts you need to keep.
Here’s a great calculator. On the calculator add your interest and property tax.
Assuming a 4% interest rate and a 1% tax rate the standard deduct versus itemize is
Married – $240,000
Again, that is saying there are no other variables. The thing is, most people have charitable deductions and other parts of the 13 things, just not enough to itemize without the added deductions from the house.
That is why it is important to understand the “cost” of your home. Our “cheap” houses didn’t have enough interest to make sense to itemize as we didn’t have enough of the other items to push us over the line.
****For military members who have tax free BAH– guess what? They get to double dip!
Can you think of any other tax consequences of owning a home?