Amazing Tax Benefits You Get for Owning a Home

Amazing Tax Benefits You Get for Owning a Home

The recent overhaul of tax laws has dramatically altered the impact a house can have on your taxes. While it used to be a significant advantage with the ability to itemize, the reality has shifted, especially for those with lower interest rates. However, for those with higher rates, particularly military members who have moved in the past year to a High-Cost of Living (HCOL) location, the impact might still be substantial.

Tax Benefits

So, before we delve into whether you are part of the small minority for whom this makes sense:

Two Food for Thought Questions –

Are you Married or Single?

Do you itemize or take the standard deductions?

One more to ponder: Do you have a CPA?

If your answer was “Itemize” for the second question, it’s highly likely that you own a house. For MOST people, the primary reason they itemize is due to homeownership, especially if they have a newer 6 to 8% interest rate and not the more favorable 2%. According to IRS rules, you are allowed to itemize your mortgage interest and real estate taxes.

First, let’s take a step back and explain two things: being Single or Married and the difference between itemizing versus the standard deduction.

Single or Married

Your marital status affects your standard deduction. While there are also categories like widower and head of household, for this article, we’ll focus on singles and married couples.

The standard deduction for singles is $14,600.

The standard deduction for married couples is $29,200.

For people to itemize, their “tax benefit” has to exceed their natural ability to itemize.

Let’s take a step back.

Standard Deduction as a married couple means the IRS gives you $29,200 off your taxes “free.” So, if you made $50,000, you are paying tax on $20,800 ($50,000 – $29,200 = $20,800).

Now on to the question: Do you Itemize or take the Standard Deduction?

This is where your HOUSE USED to become a huge tax bonus, and with the higher interest rate, some people find it makes sense again! According to IRS guidelines, you can deduct your mortgage interest and real estate taxes. These, for most people, are the largest “tie-breakers,” although some charitable donations can also be the reason to itemize. For many, charitable donations are just “extra,” but mortgage interest is the thing that really makes sense.

There is ONE large elephant in the room that one needs to take notice of!

In order for your homeownership to matter, your itemization has to EXCEED the standard deduction.

For some, that is challenging with the new tax rule, as it’s now $29,200.

So, you’re probably thinking, “You’re speaking MUMBO JUMBO, what the heck does this mean?”

For simplicity, it means your real estate taxes and mortgage insurance and mortgage interest have to EXCEED your standard deduction (real estate taxes + insurance + interest > standard deduction of $29,200 if married). If your calculation exceeds the standard deduction, then you can itemize your expenses. This is where having exceptional record-keeping skills pays off. Have a chat with your CPA to prime you on the receipts you need to keep.

Again, that is saying there are no other variables. The thing is, most people have charitable deductions and other deductions, just not enough to itemize without the added deductions from the house.

That is why it is important to understand the “cost” of your home. Yes, for most people, it doesn’t make sense, but those living in high cost of living (HCOL) areas, especially with interest rates above 5%, it could very well make sense to itemize.

For military members who have tax-free BAH in HCOL areas – guess what? They get to double dip!

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