One of the most common misconceptions about home ownership is that owning a home directly saves you money on your taxes. While it can help you on your tax return, that isn’t always the case. Plus, with the Tax Cuts and Jobs Act that passed in 2017, it’s made it even more of a rarity for home ownership to directly affect your tax return. Plus, just owning a piece of property doesn’t automatically help you on your taxes. The mortgage interest you pay on your home loan as well as the property taxes and potential PMI (private mortgage insurance) are what add up to potentially save you money on your taxes.
The essence of how your taxes are calculated is this:
Adjusted Gross Income (AGI) – Standard or Itemized Deduction = Taxable income x marginal tax rate = Total tax liability
The big determining factor of whether your home will help you on your taxes is if you itemize or take the standard deduction. What’s a standard deduction? The IRS gives you a certain dollar amount to “deduct” off your income that isn’t subject to be taxed. The standard deduction for those filing jointly used to be $12,700 in 2017 before the Tax Cuts and Jobs Act. However, the act nearly doubled those numbers by making the standard deduction for joint filers $24,000 in 2018 (now $24,800 for 2020).
Now, what does it mean to itemize your deductions? In the simplest of terms, if your mortgage interest, property taxes, and charitable contributions add up to be more than the standard deduction, you can take the greater of the two and itemize. There’s a couple of other deductions that can add into whether or not you itemize (like medical expenses and PMI) but there are more complicated rules around there.
With the Tax Cuts and Jobs Act essentially doubling the standard deduction, this has ruled a lot of people out from itemizing their deductions. According to the Tax Foundation*, only 13.7% of taxpayers itemized their deductions in 2019. With interest rates being so low, that keeps the amount of mortgage interest you pay to the bank on the low side, which keeps you from itemizing.
So, just by owning a home doesn’t mean you’re going to get a direct tax write-off. The IRS is generous with the standard deduction and, as mentioned above, is more than enough for a majority of taxpayers. As we like to say around here, “don’t let the tax tail wag the investment dog”. Always make sure home ownership has more meaning than just saving money on taxes, because it might not be saving you any.
Any opinions are those of Carson Odom and David Adams Wealth Group and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.