Tax Credit Ends...Or Does It?

May 12th, 2010

Much has been made of the April 30th deadline for home buyers to be under contract to be eligible for a special one time tax credit up to $8,000. Many families rushed to beat the deadline, many others were unable to purchase their new home by the deadline. But if you were not able to meet the April 30th deadline for the home buyer tax credit you still receive significant tax benefits when you purchase your primary residence. Don’t stop using the prequalification calculator just because the calendar turned to May!

Tax Credits vs. Tax Deductions

What has been offered to first time buyers for the past few years as a way to stimulate home sales, and to move up buyers the past year, has been a tax credit of up to $8,000. A tax credit is a one-for-one payment of the amount of the credit. If eligible for the full tax credit of $8,000 then you receive $8,000 credit against the taxes you owe, if the credit is more than your tax liability you receive a check for the difference.

A tax deduction is a sum taken not against your tax liability but rather against your taxable income. Your pre-tax health insurance premiums and/or retirement contributions deducted off your gross income as shown on your paycheck are tax deductions; they lower your taxable income. If your gross, or total, income for a pay period is $2,500 and you have $100 deducted for health insurance premiums and $250 deducted for your 401(k) your total deductions are $350; your taxable income is $2,500 (your salary) less $350 (deductions) for a total of $2,150.

A tax credit, since it is taken against the tax liability, has a bigger impact than a tax deduction from your income. But tax deductions can add up to significant tax savings.

Deductions for Homeowners

In general homeowners are able to deduct from their taxable income payments made for mortgage interest and property taxes. There are limitations on the deductions depending on the size of your mortgage, purpose of the mortgage and other variables so please check with your tax preparation professional before claiming any deductions or making a decision to purchase based upon receiving a tax deduction. Most American home buyers however fall into the income levels and mortgage levels to take advantage of full tax deductions for mortgage interest and property taxes.

Calculate Your Deduction

To estimate your tax deduction for a specific purchase price use the interest only calculator to show the monthly interest payment, multiply by twelve to get your approximate annual interest payments. Then multiply your purchase price by your local property tax rate. Add the two together and that is your annual income tax deduction due to home ownership.

Loan Amount = $300,000 rate= 5% interest only calculator shows $1,250 a month, or $15,000 per year in interest payments. Property Tax Rate = 1.25%, times purchase price of $350,000 is $4,375 per year. Total deduction is $19,375 per year you can deduct from your income.

Income Tax Savings

If your gross income is $60,000 per year deduct your mortgage interest and property tax payments from your income, $60,000 – $19,375 = $40,625 is your adjusted gross income. Your savings is the income tax payments on the $19,375. Depending on your income tax bracket the savings is several thousand dollars per year. As a rule of thumb your savings from the tax deduction is approximately equal to what you will pay for property taxes and homeowners insurance–again this is a general rule and actual savings and payments will vary so please consult your tax preparation professional.

With the help of your tax professional you can determine your monthly income tax savings and adjust the tax deductions on your paycheck to increase your take home pay and take advantage of the deductions once you become a home owner. No need to wait until you file your tax returns next year.

While the opportunity for the federal home buyers tax credit may have passed you by, tax savings from home ownership are still available for most home buyers. When determining if you are ready to convert your rent payment to a mortgage payment with use of free mortgage calculators consider as well the savings on your monthly income tax deductions you can receive as a homeowner.

Please note that the information provided here is for comparative purposes only and is not intended to be used for you to calculate your actual tax deductions or savings. Please consult a tax preparation professional for your specific tax savings opportunities through home ownership.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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1 Responses to "Tax Credit Ends...Or Does It?"
  1. Property Tax Calculator 07, Jun, 2012

    Now a days every people wants to easy way to calculate property and real estate tax you provide information about tax credits that is very good and useful for everyone.


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