Tax Breaks Unveiled
As a homeowner, you are eligible to itemize two separate tax deductions, that will save you the big bucks.
The Mortgage Interest Deduction
This tax break allows you to reduce your taxable income by the sum of all of the monthly interest payments you made on your crib throughout the tax year (limited to interest paid on $750K of debt).
Example 1: Let’s say you own a $937,500 home. Your mortgage amount is $750,000, and you pay interest at a rate of 3%. Each month you must pay your lender $1,875 in interest, or $22,500 annually. In this case, you may deduct the total amount of $22,500 from your taxable income.
Example 2: Now let’s say you own a $1,250,000 home. Your mortgage amount is $1,000,000, and you pay interest at a rate of 3%. Your monthly interest payment is $2,500, or $30,000 annually. Because the mortgage amount here exceeds $750,000, your mortgage interest deduction is limited to $22,500.
The SALT (State and Local Tax) Deduction
This deduction permits you to reduce your taxable income by the amount paid in property tax, plus either state income or state sales taxes during the tax year (limited to a total deduction of $10K).
Example 1: Assume your $937,500 property is taxed at 1.11%, requiring you to pay $10,406 in property taxes annually. You also paid $6,000 to your state in income taxes. The total amount paid in state and local taxes is $16,406, but you may only claim $10,000 as a reduction to your taxable income.
Example 2: Assume now that your $1,250,000 property is taxed at 1.11%, requiring you to pay $13,875 in property taxes annually. You also paid $6,000 to your state in income taxes. The total amount paid in state and local taxes is $19,875. Again in this case, you may only deduct $10,000 as a reduction to your taxable income.
Here’s the final caveat.
To be eligible for the Mortgage Interest and SALT Deductions illustrated above, the sum of all of your itemized deductions must exceed the standard deduction. Other common itemized deductions include: investment interest expense, medical expenses, and charitable contributions.
The standard deduction for tax year 2021 is $25,100 for married couples filing jointly, $12,550 for single taxpayers and married individuals filing separately, and $18,800 for heads of households. In both examples above, your itemized deductions include a $22,500 mortgage interest deduction, and a $10,000 SALT deduction — a grand total of $32,500 — which exceeds the standard deduction for all filing statuses.
Your true tax benefit as a homeowner ultimately depends on your effective federal tax rate. If you are taxed at 24% for example, you will recoup $7,800 ($32,500 * 24%) in tax dollars!