In weighing your decision to buy a home, you will want to consider the tax benefits you’ll gain upon a home purchase. Here are 3 misconceptions you might have had with regards to tax deductions after your home purchase, that you would want to know about if you’re deciding whether to buy a home and are hoping that the tax benefits will outweigh the costs.
(Disclaimer: This is not tax or financial advice. Speak to your accountant and financial advisor about details specific to your situation.)
Standard vs Itemized Deduction
The deductions that you’ll be looking to make with regards to homeownership (such as property taxes and mortgage insurance) will be an itemized deduction. In the recent years, you’ll have to pick between an itemized deduction and a standard deduction while filing your taxes.
An itemized deduction allows you to list all the deductions you may have (ranging from health to real estate), while a standard deduction takes into account your marital filing status, and grants you a portion of your salary that is not subject to federal income tax. A standard deduction is a lot simpler than an itemized deduction, but it is sometimes worth the effort to run the numbers on your itemized deductions to figure out if you’ll be saving money that way.
Assuming you do want to go through the long process of itemizing your deductions, mortgage insurance is one of the categories that will become an option to you assuming you financed your home with a mortgage (other restrictions apply).
Remember how your monthly mortgage payments aren’t usually equally split between your interest and your principal amount? Once you take into account the total sum you’d have paid on the interest that year (take your total mortgage payments for the year and exclude the sum that went towards your principal), you can add that as an itemized deduction.
Alongside mortgage interest, you’d want to add the property tax that you pay to your itemized deductions as well. There is a cap on the total you can claim (currently set at $10,000/year).
You can either work out the math with your accountant or run the numbers on an online tax software (here are the best ones sourced by LendEDU). Once you plug in the mortgage insurance deduction, and the property tax deduction (alongside the smaller real-estate-related deductions like those on home equity loans and points/credits on your mortgage, and non-real estate ones like health benefits and 401K), you would want to compare if you are saving more money this way, or via a standard deduction.
Matter of fact is that you might NOT be saving that much more in taxes after purchasing a home because of a standard deduction, not to mention the huge expenditure in closing costs, property taxes and monthly mortgage payments. Tax benefits should probably not be the only reason you choose to buy a house (though there are other wonderful reasons that you would want to consider, that range from financial to psychological).