Someone 'splain "tax deductible home mortgage interest" to me. (1 Viewer)

[Travis Hedger]

Well the W2's will be on their way in a few weeks and on average I get $1200 to $1500 back on my tax return.

People tell me that owning a home is a "good thing(tm)" due to the fact that the interest is tax deductable. I purchased my home in Dec of 2000 so that would mean a full year worth of interest to claim on my ought 2 1040.

If I understand this right would this mean that say I paid in $5000 in fed taxes and my mortgage interest was around $3000. Would that mean I get a bigger refund since my tax liability would be reduced due to the home mortgate interest?

If not can someone 'splain it to me in an easy to understand way?

 

[Paul Jenkins]

yep, that is the basic idea. to claim the home mortgage deduction, you have to itemize your deductions, which means no 1040EZ form, you have to fill out Schedule A. The nice thing about this is that you can now deduct other things through the year as well, including charitably contributions, etc.
One quick point, make sure to check both itemizing and not-itemizing your deductions. Sometimes the standard deduction is MORE than what you paid on interest to your mortgage. Usually this is when your house payment isn't that much and you have a large standard deduction (say, if you are married).
Welcome to Taxville, some call it hell on earth

 

[MarcVH]

You probably won't get much if any tax savings, I'm afraid.

You don't say how you're filing, but I'll assume you are single. Your federal standard deduction is $4,550 (i.e. you get to deduct that much no matter what.) You get no tax benefit unless your itemized deductions are more than that. Your $3,000 worth of interest doesn't do it; however, you may have some other deductions (property taxes, other state taxes, charitable contributions, etc) that will push you over that level.

This is a typical situation for people who live in places where housing is less expensive, and hence mortgage interest may not be all that high. Consider yourself lucky you don't live where an old 2 bedroom starter house costs $300,000.

 

[Craig S]

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on average I get $1200 to $1500 back on my tax return.

Wow - that's a big refund and it will get even bigger with your mortgage deduction. You do realize you're giving the government an interest-free loan? If you're getting that much money back on your refund you need to fill out a new W4 and increase your allowances to reduce the amount of tax withheld from your paycheck. Take the extra money you get in your check and have it deposited directly into savings and earn some interest on it!!

Also, be aware that not only is mortgage interest deductable, any real estate/property taxes you pay are also deductable. Being a new homeowner these are probably paid by your mortgage company out of escrow. You should look for a Form 1098 in the mail from your mortgage company detailing all deductable interest & taxes associated with your mortgage (they are required by law to send it out by Jan 31, I believe).

 

[Travis Hedger]

Your $3,000 worth of interest doesn't do it;

This was just a figure, heh, since this is my first year of actual ownership I believe I am pushing around $5500 to $6000 in interest and I am married.

I do have my property tax paid out of escrow yet didnt know that could be deducted too and I will be getting an itemized list of interest and taxes at around the same time as my W2's come from work! woohoo!

For the last 3 years I was single and was able to file my taxes online with a 1040EZ in about 30 minutes of work each time. But with being married I am going to have the accountant look at if we should file jointly or seperately to see which will be better. I have also adjusted my W4 for higher deductions to include me and my wife so I may have a bit less than $1200 on the standard refund as I have never been married before. Also is this the first year that the marriage tax will have no bearing or is that not in effect yet?

 

[Denward]

Don't confuse a tax deduction with a tax credit. Say you have 100,000 in taxable income and you're in the 28% tax bracket. You would owe 28,000 in taxes.

If you have a 10,000 deduction, that reduces your taxable income to 90,000 so now you owe 25,200 in taxes.

If you have a 10,000 credit, that reduces your taxes to 18,000.

 

[ken thompson]

Filing jointly or separately doesn't affect anything. The fact remains that you are married and will be taxed as such. Since you are married, your standard deduction doubles to $9100. So if you do not exceed this in itemizing you are not better off. You dont need an accountant, thats a waste of money. Just read the directions that comes with your tax forms they are very straight forward. I owe about $120,000 currently between my home and my boat which qualifies as a second home and is also deductible. That with a few other small dedutions get me to about $11,000 in itemized deductions. The real benefit being the difference of $1800 at a tax tier of 35% yields a total net benefit of $630. Spend much time with an accountant and that is all gone. Also keep in mind that if you bought the house this year any points you paid getting your mortgage are also deductible that first year.

 

[Philip Hamm]

You bought your home in Dec. 2000 and didn't claim taxable interest on your 2000 taxes??!?!? I sure hope you didn't pay any "points" on your mortgage or you threw away hundreds of dollars by not claiming it.
My advice: Get TurboTax, put in all your forms (including the interest forms, 1098 I think),and let it do the work. Expect a healthy refund. And if you paid a full year mortgage and only paid $6000 in interest your mortgage payments must be REALLY low, like $700/month or something. TurboTax will also do a W4 for you so if you want to see more of your money through the year you can use that feature.

 

[Craig S]

Travis, I'm with Philip - get Turbo Tax (the standard edition will probably be fine) and let it do the work. Married homeowner is NOT a complicated tax situation - it's not worth hiring an accountant or tax preparer, IMO. Turbo Tax will let you compare multiple scenarios (filing jointly or separately) and tell you what's your best option.

 

[Hugh M]

"Lucy, I'm Home..You got some 'splaining to do!!"

 

[SteveA]

"Say you have 100,000 in taxable income and you're in the 28% tax bracket. You would owe 28,000 in taxes."

That is not a true statement. You would only pay 28% on the portion of your income IN EXCESS of the minimum cutoff for the 28% bracket. If the 15% bracket was for income between 0 and 60,000, and the 28% bracket was for income between 60K and 110K - then someone with a taxable income of 100,000 would owe 15% of 60K (9000) PLUS 28% of the remaining 40K (11,200) for a total of $20,200.

 

[MarcVH]

The fact remains that you are married and will be taxed as such. Since you are married, your standard deduction doubles to $9100

This is NOT true. The standard deduction for tax year 2001 for someone married, filing jointly is $7,600. Note that this is less than twice the deduction for a single person ($4,550.) Here's a tax table.
I'm not sure what you mean by "the marriage tax will have no bearing." The fact that the married deduction is less than twice the single deduction is part of the "marriage penalty", the situation in which two single people who earn similar incomes will pay more taxes as a married couple than as two single individuals. That is being phased out over time.
You don't mention anything about your wife's earnings, but if you have dissimilar incomes then you will be getting a marriage bonus (i.e. the opposite situation.) This will reduce the taxes you pay. Note that how much you pay in taxes is what matters, not how big your refund is -- a big refund just means you're giving the government an interest-free loan.
Anyway, as a married person with $6,000 in mortgage interest, your other taxes may push you over the $7,600 mark but probably not by very much, so your tax savings will probably be pretty modest. Over time, the interest you pay on your mortgage will go down, while the standard deduction will go up (it's adjusted for inflation every year) so your tax savings will shrink over time.

 

[MickeS]

Marc, it doubles from "married filing separately". If you're married, you can't file as "single".

/Mike

 

[ken thompson]

Whatever the standard deduction is for married people. The dollars are the same whether filing joint of separate.

 

[Ryan Wright]

Wow, this is a great thread.

How do I find out which tax bracket I'm in, and from there figure out what I'll owe in taxes next year? I'm starting a new job Monday with a significant pay raise and need to figure all this out, as well as decide how to fill out my W-4...

 

[MickeS]

Ryan, I'd suggest, like other have done, to get TurboTax. I've used it the past 2 years, and it makes things really easy. For a small fee (I think like $10) you can submit your tax forms electronically with it too, I did it last year and it made things really simple. Great product.
Oops, that wasn't really what you asked about... sorry.
/Mike

 

[MarcVH]

Your tax rate is pretty easy; it's in the table I cited above. If you want a more detailed look at estimated taxes, fill out Link Removed.

 

[Anthony Hom]

The big thing is working out your W4. Refunds are so overrated. That only means you paid out to the feds all this payroll witholding. Most people who are single take 0 or 1 witholding, but married, homeowners head of households end up taking 5-6 witholdings and higher.

If you take the time to do the W4, you will get more dollars per paycheck. If you paid the taxes correctly, you should get a modest refund, meaning you maximize the amount of money in YOUR pocket. Otherwise if you get a $1000 refund, that's interest on $1000 that the fed earned for itself.

Yes, get turbo tax. It will answer many of your questions regarding deductions and planning for next year, so you don't so much of your weekly payroll to the IRS.

 

[Patrick Sun]

It's been my experience that the savings you get from being able to deduct the mortgage interest will pay for one house payment each year. (That's is in the 1st 5-10 years of the mortgage, after that, you'll be paying more in principal, and less in interest, so you'll be deducting less interest later).

 

[Craig S]

For a small fee (I think like $10) you can submit your tax forms electronically with it too, I did it last year and it made things really simple.

Good point about e-filing, Micke. And Turbo Tax even comes with a coupon that rebates your e-filing fee. It's the only way to go!