main Your home is an investment that provides major tax incentives through all levels of ownership :. When you buy it, you own it and generous exclusion from tax when you sell it
A. Mortgage interest and Real Estate Tax Deduction
The mortgage interest you pay on the main and second homes Your tax deductible as an itemized deduction. This means that the mortgage interest you pay may reduce your taxable income the interest you pay meets one of the following criteria.
The mortgage was taken out to build, buy or improve your home and the loan equals one million dollars or less.
The mortgage does not exceed the amount used to buy, build or improve your home more than $ 100,000.
The mortgage was taken out before October 13, 1987.
To get a true picture of the actual tax savings to pay mortgage interest I suggest completing two calculations. First; calculate tax before interest deductions. Then calculate the tax with interest deduction. The difference between the two calculations is real savings tax.
This calculation takes into account the standard deduction and changes in marginal income tax.
In 2006, the standard deduction for a single person was $ 5,150 and married filling material common now it was $ 10.300. Failure to consideration of tax effects on a standard deduction may blow a tax savings of $ 515 to $ 3399th
Marginal tax rate is the rate at which the last dollar you earned is taxed, the rate changes increases taxable income.
Example: Jim files jointly with his spouse and joint income is $ 220,000 they pay $ 40,000 in favor of the mortgage, paying $ 9,000 in property tax and $ 11,000 in other deductions. Their total assets are itemized deductions are $ 60,000 they are in marginal tax bracket of 33% for federal and 6% for their condition so their tax savings of $ 40,000 mortgage interest rates could be expected to be $ 15,600 at 39% rate. Let’s do the calculations and see.
deduction is no mortgage is $ 20,000. We draft exemptions the couple $ 6,600 $ 20,000 after deductions. we came up with taxable income of $ 193,400.and tax of $ 43,803. Then we calculate tax with mortgage added to the schedule A. taxable income is now $ 154.800. Why not $ 153,600? Response to income limitation on schedule A. tax 154.800 is $ 32,748 tax savings of $ 11,055 for federal income tax and $ 2,400 for a total of $ 13,455 this saving 33.6% not 39% income tax state, although this is still a good savings I have illustrated why we have to bear tax tax table rather than just calculate the tax savings on the current tax rate of
Now, let’s answer the question :. Why is real savings tax $ 2,145 or 5.4% less than guest ment?
The answer lies in the complex structure of the tax system. Jim and his spouse would get some deduction if he pays the mortgage interest or not. In this example, they were only paying 33% federal tax on the $ 5,000 taxable income and a 28% federal tax on the previous $ 64,750 of taxable income. Overnight state income tax to 6%.
Those who are in the lower income levels get less tax benefit of dollars in mortgage interest rates until it reaches the point that some taxpayers may not receive any direct tax benefits of the mortgage. Fortunately, the tax benefits of mortgage interest rates is not the only reason to buy a home.
Regardless tax benefits people have learned that the best way to start building wealth is to own your own home.
Next tax benefit that I will cover the tax exclusion on the main home. Those who get a windfall because something happened in their neighborhood to greatly increase the value of their home to find that these tax benefits can more than compensate for the interest tax savings they may miss this.
To help you understand the value of exclusion take a look at the case below:
A couple buy a home and sell it 11 months latter for $ 250,000 gain. Since the property is held less than one year, this is a short term capital gain and is taxed as ordinary income. Depending on other income of additional federal taxes between $ 62,481.50 and $ 82,500. Many states have State Tax that would be up to $ 17,000.
Delaying the sale month so that the sale is considered for the treatment of long-term capital gains federal tax down to $ 31,370. They went up to $ 51,130 just by changing the time limit on the sale of
Now let’s see what happens when the couple meets two simple tests :.
Use of test and ownership test. The two tests simply ask if they had a home and lived in it as your primary home for at lease two of the last five years. If so, each spouse can exclude up to $ 250,000 of the proceeds from the sale of tax.
Once they meet these two tests federal taxes is “0”. In most countries, the state tax would also be “0”.