What exactly is tax-deductible?
Everyone's tax situation is different, so you should always consult with your tax advisor before assessing your specific tax situation. For most, mortgage interest payments are tax-deductible. The part of your mortgage payments that go directly to paying down your mortgage balance is not. In addition, up to $10,000 in property and state taxes are also deductible.
But taxes are complicated. Just because something is tax-deductible does not mean you will automatically receive a refund. Instead of listing all of your deductions, households can elect to take what's called the “standard deduction.” In 2018, this is $12,000 for individual filers and $24,000 for married couples filing jointly. On a home that costs more than $400,000, as a married couple, you will likely receive a bigger deduction by listing out all of your paid interest and property taxes instead of taking the standard deduction.
So I'll just get a big refund at tax time?
That is one option. Another option that many homeowners pursue is to adjust their salary withholdings to significantly increase the amount they receive on their paycheck. This makes paying for high housing costs a little more manageable.
How do I adjust my withholdings?
All you need to do is contact your payroll or HR department and request a W4 form. This form will tell your employer how to treat your income for tax purposes. This is the most complicated part of the process, as you'll need to estimate how much you'll likely receive in itemized deductions when you file your taxes. A tax advisor can help you with this.
So should I think of the tax benefits as a discount on my monthly payments?
That is probably not the best way to think about it. For one, remember that the benefit is only applied to the taxes you pay. If for one reason or another, you don't have enough taxes to pay (either as a result of losing your job, reduced income, or other significant tax deductions), you'll still need to pay your full monthly home payments.
Is there a limit to the mortgage interest and property tax deductions?
Yes. Currently, interest payments are only deductible for the first $750,000 of your mortgage balance. Your property and state taxes are only deductible up to the first $10,000 paid. In addition, there are also different phase-out rules for property and state taxes that you should consider.
Although there are currently large tax implications to buying a home, the federal government could easily change the rules again.
Although the information above is intended to be informational, it does not constitute advice. Taxes are complicated and highly variable from individual to individual. You should always discuss your personal tax situation with a professional. This article reflects the 2018 Tax Bill.