When you sit down to do your taxes and see how much money the government is taking, it might help to know that you probably would be paying a lot more if you didn`t own a home.
For many people, the deductions allowed for interest paid on a home mortgage substantially reduce the tax bill. Home ownership is one of the few remaining tax shelters commonly available.
But it can be difficult to figure out just how much you`ll save in taxes by paying interest on a mortgage. The savings depend on your tax bracket (15 percent, 28 percent, 33 percent) and your tax filing status (married filing jointly, single, head of household, etc.).
In round figures
You can make a rough estimate simply by multiplying the mortgage interest you pay by your tax bracket.
For example, if you paid mortgage interest totaling $15,000 and fall into the 28 percent tax bracket, your tax savings would be about $4,200. If your tax bracket was 15 percent, you would save $2,250.
That simple calculation overstates the savings for many people because part of their income is taxed at 15 percent, part at 28 percent and, in some cases, part at 33 percent.
If you have federal tax forms from 1990 handy, you can get a more precise number by calculating your taxes with the mortgage interest and real estate taxes included, then eliminate those deductions and see how much more tax would be due.
For instance, the Joneses, a married couple filing jointly, have a gross income of $65,000. Their deductions, including $15,000 in mortgage interest, $2,500 in real estate taxes and $2,500 in charitable donations, come to $20,000 and they have $8,200 worth of personal exemptions, leaving their taxable income at $36,800. Their federal income tax is $6,093.
Without a shelter
Suppose the Joneses didn`t own their house. That would eliminate the $15,000 deduction for mortgage interest and the $2,500 deduction for real estate taxes, leaving the family with only $2,500 in charitable deductions.
In that case, the Joneses would not need to itemize deductions. They would take the standard deduction of $5,450 for a married couple filing jointly, plus the $8,200 personal exemptions, leaving taxable income at $51,350. Their federal income tax would be $10,160.
By paying the mortgage and real estate taxes, the Joneses saved $4,067 in federal income taxes for the year, or $338 a month.
That means if the Joneses were renting a house for about $1,150 a month, they could afford $1,480 monthly payments of mortgage and real estate taxes at about the same cost because of tax savings.
