Homeownership Opens the Door to Tax
If the recent dip in
mortgage rates has you contemplating homeownership,
it pays to do some tax calculations before you start
shopping around subdivisions. Homes remain one of the
most lucrative tax shelters left in the tax code. But
many people underestimate the value of those benefits.
For example, assume mortgage interest and property taxes
total $1,400 a month. For a homeowner in the 28 percent
tax bracket, deducting the payments would result in
federal tax savings of as much as $392 a month. That
would reduce the out-of-pocket cost of the $1,400 monthly
payment to $1,008.
Home mortgage interest and points provide
the big payoff.
The biggest tax savings available to the
majority of homeowners come from mortgage interest.
Each year, taxpayers who itemize can deduct interest
paid on up to $1 million in mortgage debt incurred.
In addition, the interest you pay on up to $100,000
of home equity debt is also fully deductible, regardless
of how you use the funds. Even late-payment fees assessed
by your lender are deductible. Keep in mind that these
tax deductions and certain other itemized deductions
are phased out for some high-income taxpayers.
"Points" paid to a mortgage
lender can also be deducted right away. Points are the
one-time fees that are routinely assessed on mortgage
loans to boost the effective yield to the lender. These
charges often run thousands of dollars.
Property taxes are fully deductible.
While real estate taxes can add substantially
to your monthly mortgage payment, the amount you pay
to local and state authorities is fully deductible (subject
to high-income phase-out rules). Many lenders include
in monthly statements an amount placed in escrow for
real estate taxes. Your deduction for real taxes. Your
deduction for real estate taxes is equal to the amount
the lender actually paid from escrow to the taxing body.
Be aware that this amount may be more or less than what
you contributed to escrow during the year.
Special credit for low-income buyers.
Some states participate in the Mortgage
Credit Certificate (MCC) Program, designed to help low-income
buyers afford homeownership. You may be able to claim
a tax credit up to a maximum of $2,000, rather than
a deduction for part of the mortgage interest you pay.
If you have any unused credit, you can carry it over
for the next three tax years. Interest not qualifying
for the credit is deductible as home mortgage interest.
To be eligible for the credit, you must obtain a mortgage
credit certificate from your local or state government
before you obtain a mortgage. Contact Pennsylvania's
housing finance agency www.phfa.org/index.htm for information
about the availability of MCCs.
Article continued at http://www.pacreditunions.com/commoncents2001/homeownership.htm