Tax Deductibles and Tax Interests of Home Mortgage
Owning a home sounds more of a dream come true, but the dream shatters upon knowing how much you need to pay on your mortgage, not to mention the amount of interest that needs to be paid as well. However there are ways on how to save money by knowing how to calculate the deductibles and versus the tax interests. Being knowledgeable on that area will allow home owners to identify the amount of money they need to cut out of their paychecks. First is to define what tax interests are all about, it was introduced in 1913 together with the income tax. When a real estate company charges the home owner with the interest for the purchased property, the law provides home owners with the opportunity to claim for deductions on their taxes. However, it is not easily available. The home owner must a set of criteria to qualify for a tax interest deduction or otherwise known as limitations. First, the home owner must file Form 1040 or the Standard Internal Revenue Service (IRS). Individuals file this form in relation to their annual income tax returns. The form should come with itemized deductions on Schedule A. The second condition is he or she should be by law is the one liable for the loan, if the situation is the person is paying mortgage for someone else’s loan, the payer will not be allowed to claim for deductibles. The third condition is he or she should be making the payment on a qualified home such as Condominium, Boat, house Trailer, Primary home and Mobile Home (Investopedia.com May 27, 2006).
The home mortgage interests tax deductions has two categories, one is the debt acquired from purchasing home or for improvements. The other one is called equity debt where collateral is often used drawn from the home equity. Therefore, a home owner can take out a maximum tax interests applied to a $1.1 million worth of mortgage from his tax payables. However, not all mortgage interests can be deducted just as is. Each mortgage must fall under any of the three categories. Debt made before October 13, 1987 or also known as “Grandfathered Debt”, in this category all interests on the debt will be deducted entirely. Debt made after October 13, 1987 can be deducted including the grandfathered debt entirely, provided that the debt were used for home improvements or purchase. For single status individuals they can claim as much as $500,000 or $1 million for married couples. Lastly, the Home Equity Debt Acquired after October 13, 1987 any reasons besides the ones mentioned on the first two categories can be filed at a maximum of $100,000 for married or $50,000 for single individuals (Irs.gov. N.D).
The formula in computing tax savings from mortgage interests is quite easy to understand. First is to know the information about the debt such as Loan amount, normally the financial institution will send a form 1098 that will show how much the home owner paid in total mortgage interests every year. The calculation works as follows, identifying the size limit as mentioned it is usually $1 million for married and $500,000 for single. In case the home owner is a couple and has $1.25 million worth of mortgage, we can figure out how much we can save by dividing the size limit versus the average mortgage balances and then multiply the result to the total amount paid on the interests. Given that the mortgage amount is $1.25 million and has a 10% total annual interest and the home owner is a married couple, just divide limit $1.0 M by $1.25 M, the result will be 0.8 and then multiply it with interest ($100,000) and the result will be $80,000 of total tax interest deductions or the amount of money the homeowner saved on his tax deductibles. The formula can be put into equation as follows (size limit / mortgage = result X interest = tax interest deductible) and to get the marginal tax bracket follow equation (mortgage X interest rate = deductible interests).
References
Investopedia.com. (May 27,2006). Tax Deductions On Mortgage Interest Web. November 28,2011 from http://www.investopedia.com/articles/pf/06/MortIntTaxDeduct.asp#axzz1ezeMBThg
Irs.gov. Publication 936 - Main Content (n.d.). Qualified Home Web. November 28,2011 from http://www.irs.gov/publications/p936/ar02.html#en_US_2010_publink1000229900
