Chapter 2: Adjust for the Tax Benefits of Homeownership

While a mortgage payment may seem high at first, there are significant tax advantages to homeownership. Mortgage interest and property taxes are tax deductible, which increases your net income and offsets some of the cost of the mortgage payment. Table B illustrates the estimated annual deduction for a $150,000 home and a $350,000 home.

If your adjusted gross income was $40,000 last year, and you bought the $150,000 home, your adjusted gross income this year will be $29,800:

– $40,000 adjusted gross income
– $10,200 mortgage deduction
= $29,800 new adjusted gross income

Assuming you are in the 28 percent tax bracket, your tax savings will be approximately 28 percent of your total mortgage deduction:

$10,200 x 28% = $2,856 annually ($238 monthly)

If your adjusted gross income was $80,000 last year, and you bought the $350,000 home, your adjusted gross income this year will be $52,100:

– $80,000 adjusted gross income
– $27,900 mortgage deduction
= $52,100 new adjusted gross income

Assuming you are in the 33 percent tax bracket, your tax savings will be approximately 33 percent of your total mortgage deduction:

$27,900 x 33% = $ 9,207 annually ($767 monthly)

You can either receive a tax refund at the end of the year, or raise the number of standard exemptions to have fewer taxes withheld (equaling the amount you would have received as a tax refund). The net effect is the same – you are simply choosing to use your year-end tax refund on a monthly basis.