Does Buying a Home Help with Taxes?

Does buying a home improve my tax situation? So in order to answer this question, I need to first explain the tax situation related to if you have a home or don't have a home. So on your personal tax return, you can either take a standard deduction or itemized deduction. So you basically have taxable income, Or I should say you have adjusted gross income, then the standard deduction or itemized deduction, which reduces your adjusted gross income to get to a taxable income number. Now obviously there's more numbers in there, but that's the general gist. So the standard deduction currently is $12,000 per person. So You could make less than $12,000 in adjusted gross income and not pay any tax because the standard deduction, which everybody is just automatically given, reduces your taxable income by that amount. That means if you're married filing jointly versus married filing separately— so married filing jointly, married, both of you and your spouse are on the tax return. You get $24,000 of a standard deduction. Now, there may be scenarios where your itemized deduction is higher, in which case you would take that number. Again, I'm just giving you this some background context, because I'm going to answer the question, does buying a home really help my tax situation? Or how can I help my tax situation? So we just first have to establish every taxpayer married filing jointly automatically has $24,000 that is subtracted from their income that they don't pay tax on, automatically given. Now itemized deductions is what we look at, um, to see if that might be better. And this is going to include currently up to $10,000 of property tax And state income tax paid. And anyways, for a lot of people, it caps at $10,000, but it might not. But anyways, it caps at $10,000. So if I have property tax of $3,000, and I paid another $20,000 in state income tax, even though that represents $23,000, I only get to take $10,000. That's an itemized deduction. So $10,000 of property tax/income tax. There's a few others in there. But again, I'm just covering the majority, the general scenarios that most taxpayers have. Then you can have charitable contributions. So if you're donating money to nonprofits, not just giving money away, if you're a generous person, and you're giving money to neighbors and friends and family, That's not classified as a taxable charitable contribution. Those donations have to go to a nonprofit organization. And if you're doing that, that's an itemized deduction. So we have a decent amount of clients who pay 10% of their income in a form of tithing, which is a charitable contribution to a nonprofit organization. Okay, so again, we're looking at itemized deductions, property tax, income tax paid capped at $10,000. If I do any charitable contributions, that's another line item of itemized deductions. And then your mortgage interest. And that's where we get to the crux of answering the question, can buying a home help my tax situation? If your property tax plus income tax Plus, again, capped at $10,000, plus your charitable contributions, plus your mortgage interest— if those 3 numbers add up to be more than $24,000 if you're married, or more than $12,000 if you're filing single, then yes, buying a home could improve your tax situation. Now, as of the recording of this video, Interest rates have gone up from what they were over the last, say, decade. Currently, a home mortgage loan is probably going to be— I'm going to check the stat over here because I pulled it up— currently going to be, you know, somewhere between 5% to a 5.8%, 5.9% mortgage interest rate. At that interest rate, A home of $350,000 or more would result in mortgage interest that is likely going to be around $22,000 to $26,000. So if you're looking at buying a home, and those— that's your interest rate, And that's the home purchase price or above, then yes, buying a home can help your tax situation. Because now what happens is, while you're paying off your loan, which improves your wealth, right, because now you have more equity in the home and you get closer to the point of having it paid off, wealth grows. You also get the tax advantage of paying less taxes because the mortgage interest reduces your taxable income. As a general principle, what you're going to want to look at is the interest amount you would be paying on a yearly basis. When you're looking at those 3 numbers, remember standard deduction $12,000 or $24,000 compared to itemized deduction, property tax and income tax paid capped at $10,000, charitable contributions, mortgage interest. So to figure out your mortgage interest, just go to like a mortgage interest calculator. Sometimes there's amortization schedules. That's the fancy schedule that breaks out of your payment how much goes towards paying down the loan and how much goes towards interest expense and how much is maybe the property tax. Breaking all that down, you can figure out how much you're going to pay every 12 months or in the calendar year, January through March or January through December. and how much you're going to pay in interest expense. So those 3 numbers are what you want to look at. If those 3 numbers are more than the $12,000 if you're single or $24,000 if you're married filing jointly, then buying a home can help your tax situation. So hope that helps. We love helping our clients save taxes, and my team has put together a lot of simple summaries of some of the strategies that we do. So if you want to head to our website, insighttax.com/wealth, because saving on taxes increases your wealth. It's the largest expense that most people will have in their lifetime. Reducing it every year is going to put you one step closer to, uh, being better off than those who are not paying attention to this. So go to insighttax.com/wealth and look for our free handouts where we provide some simple strategies that, um, again reduce your tax bill. Remember, profit is a choice. Have the courage and wisdom to choose it.