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Pay Your New Home with the Help of Uncle Sam

Congratulations, you’ve decided that it’s time to realize your lifelong dream and purchase a home for your family. You’ve been paying rent for a number of years now (too many) and have nothing to show for it.

Well there’s some great news in store for you. Your Uncle Sam, the US government will help you pay for it. Hard to believe but certainly true.

When you pay rent every month, you send your landlord a check at the beginning of the month and get no additional benefit from it. You see, rent payments made for your living quarters are not deductible on your income taxes. This is not true when you own a home and are making monthly mortgage payments.

Your monthly payment is made up of the following different items:
  • Principal payment on the loan
  • Interest on the loan
  • A portion of your annual homeowners insurance premium
  • A portion of your annual real estate taxes
Of the above items (b) Interest and (d) real estate taxes are deductible on your income tax return.
(There may be additional components of your mortgage payment depending on your local taxes and customs, which may also be deductible. These vary in different parts of the country. Check with your local authorities.)

Let’s take an example and see how you can use this to your benefit.
Current rent $1,250 per month
Proposed mortgage payment $1400 per month
Your mortgage payment breaks down like this:
Principal $50.00
Interest $1000
Homeowners Insurance $100
Real estate taxes $250
Total: $1400

Your monthly interest and real estate taxes can be deducted from your income tax return. These two items total $1250 per month ($1,000 for interest and $250 for real estate taxes.) If you are in the 25% tax bracket, this deduction will save $312.50 per month in taxes that you otherwise would have had to pay the government. Your effective monthly mortgage payment is really $1,087.50($1400 less 312.50) In this example; this is less than you were paying in rent.

Total mortgage payment $1400.00
Monthly savings on income taxes $312.50
Effective monthly mortgage payment $1,087.50

Now, here’s the important part. Since you are saving $312.50 per month in income taxes you can fill a new form W-4 with your employer and ask them to reduce your withholdings from your salary by $312.50 per month. You’ve just given yourself a monthly raise of $312.50 which you can use every month toward your mortgage payment of $1400-thereby effectively reducing the payment to $1,087.50-which in this example is less than your rent payment.


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