How Much Can Homeowners REALLY Save at Tax Time?

Mortgage tax deductions and credits make tax time a little less stressful when you own a home.

If you’re a first time homeowner, and bought your home in 2017, this year you are going to use 2017 mortgage tax deduction rules to calculate your savings.

If you are a first time home buyer, and plan to purchase a home in 2018, your mortgage tax deductions will follow the new 2018 tax rules.

We cover both 2017 and 2018 mortgage tax deduction guidelines below.

Mortgage Tax Deductions and Tax Credits

Owning your primary home that you live in can make you eligible for tax benefits that you would not have access to as a renter.

These mortgage tax benefits include income tax deductions, and income tax credits.  What’s the difference?  Let’s take a look.

If you are itemizing your deductions on your federal tax return, you are allowed to deduct your mortgage interest, and in most cases, your property tax.

• A tax deduction means that you can reduce your taxable income by the amount of deductions you claim. In some cases, your deductions could drop you into a lower tax bracket, and increase your savings even more!
• A tax credit is a dollar for dollar credit against the taxes you owe.  An example of a mortgage tax credit would be your local Mortgage Credit Certificate (MCC) program.

We will show how each of these tax benefits affects the total amount of taxes you will pay at the end of the year.

2017 and 2018 Tax Brackets

Your tax bracket is is determined by what your taxable income is, after you’ve claimed all of your deductions.

If you bought your home in 2017, you are going to use the 2017 tax brackets when filing your taxes for last year.  Let’s see how they compare to the new 2018 tax rules.

2017 Tax Bracket if you file as Single

• 10% – $0-$9,325
• 15% – $9,326-$37,950
• 25% – $37,951-$91,900
• 28% – $91,901-$191,650
• 33% – $191,651-$416,700
• 35% – $416,701-$418,400
• 39.6% – $418,401 or more
• Standard deduction – $6,350
• Personal exemption – $4,050
• Can write off up to $1,000,000 of eligible mortgage interest on your primary residence

2018 Tax Bracket if you file as Single

• 10% – $0-$9,525
• 12% – $9,526-$38,700
• 22% – $38,701-$82,500
• 24% – $82,501-$157,500
• 32% – $157,501-$200,000
• 35% – $200,001-$500,000
• 37% – $500,001 or more
• Standard deduction – $12,000
• Personal exemption – None
• Can write off up to $750,000 of eligible mortgage interest on your primary residence

2017 Tax Brackets if you file as Married

• 10% – $0-$18,650
• 15% – $18,651-$75,900
• 25% – $75,901-$153,100
• 28% – $153,101-$233,350
• 33% – $233,351-$416,700
• 35% – $416,701-$470,700
• 39.6% – $470,701 or more
• Standard deduction – $12,700
• Personal exemption – $8,100

2018 Tax Bracket if you file as Married

• 10% – $0-$19,050
• 12% – $19,051-77,400
• 22% – $77,401-$165,000
• 24% – $165,001-$315,000
• 32% – $315,001-$400,000
• 35% – $400,001-$600,000
• 37% – $600,001 or more
• Standard deduction – $24,000
• Personal exemption – None

Maximum Mortgage Interest Deduction

If you are a home owner filing your 2017 tax return, you can write off up to $1,000,000 of mortgage interest from your primary residence.

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In 2018, you can write off up to $750,000 of eligible mortgage interest on your primary residence.  This will not affect most home buyers, and is a reduction at the top of the scale.

How to Calculate Your Tax 2017 Tax Savings

NOTE: This example ONLY shows the mortgage tax deductions, and does not include other tax deductions or credits you may have.

We are also using fixed numbers for our homeowner example for our sample tax payer, so your actual savings and calculations will vary.

Let’s take a look at an example of how you can turn tax deductions and credits into dollars that you actually have in your pocket.  That’s what really matters, right?

For the purposes of this example, we are going to use the following numbers:

Loan Amount: $300,000
X
Interest Rate: 4.00%

12 Months Mortgage Interest – Tax Deduction = $12,000

In this example, our 2017 home owner is filing as Married, and the household earns $87,000 of taxable income per year.

Your taxable income is your income after your employer has taken out all pre-tax deductions like Federal and State payroll tax, social security and medicare, health insurance, and any other deductions you may have.

Let’s take a look at our example home owner and how much money his new home is going to save in 2017.

• Starting taxable income – $87,000
• 2017 mortgage tax deduction – $12,000

Your new taxable income, after deducting your mortgage interest, has been reduced to $75,000.  But wait…..there’s MORE!

Deducting State and Local Taxes in 2017

In 2017, your are also able to deduct your property tax.  Your property tax falls under your SALT allowances, which stands for State and Local Taxes.

For our example, we are going to use a property tax rate of 1.00% of the purchase price.

Let’s say this buyer put $25,000 down payment, so the purchase price was $325,000.  The property taxes over a 12 month period would be $3,250.

Subtract another $3,250 in addition to your mortgage tax deduction, and our happy home owner couple is now being taxed on only $71,750 of taxable income.

Your new taxable income also dropped you into the next lower tax bracket!

• If you were NOT a home owner in 2017, you would have paid 25% of $87,000.  The taxes you owe would be $21,750.
• In 2017, if you WERE a home owner, you would have paid 15% of $71,750.  Your taxes would be $10,762.50.

That’s an EXTRA $915.63 in your pocket EVERY MONTH! 

How to Calculate Your Tax 2018 Tax Savings

Using all of the assumptions in the above, 2017 home owner scenario, let’s look at how your tax deductions might change with the new 2018 tax laws.

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Let’s take a look at our example home owner and how much money his new home is going to save in 2018.

• Starting taxable income – $87,000
• 2018 mortgage tax deduction – $12,000

Deducting State and Local Taxes in 2018

In 2018, you are allowed to deduct State and Local Taxes (SALT) up to $10,000.  This number includes your State income tax, and your local property taxes.

High cost areas of the Country may see limits on what they can deduct in 2018.

Using our example homeowner, our new taxable income, after deducting your mortgage interest, has been reduced to $75,000.  Then we get to deduct your SALT.

Using the same property tax rate as we used in the above example home owner, we will use a tax rate of 1.00% of the purchase price.

As in the previous example, let’s say this buyer put $25,000 down payment, so the purchase price was $325,000.  The property taxes over a 12 month period would be $3,250.

Subtract another $3,250 in addition to your mortgage tax deduction, and our happy home owner couple is now being taxed on only $71,750 of taxable income.

• If you were NOT a home owner in 2018, you would have paid 22% of $87,000.  Your taxes would be $19,140.
• In 2018, if you WERE a home owner, you would have paid 12% of $71,750.  Your taxes would be $8,610.

That’s an EXTRA $877.50 in your pocket EVERY MONTH! 

2018 First Time Home Buyer Tax Credit

If you were a first time home buyer, and you used a Mortgage Credit Certificate (MCC) your taxable income can be reduced even further by this mortgage tax credit.

Because the MCC program is a Tax Credit, it is deducted from your actual tax liability.  MCC programs may vary greatly between States and Counties, so savings are estimated.

In my State of business, California, you may be using a CalHFA 25% Mortgage Credit Certificate.

There are a couple of different calculations that need to be done to convert 25% of your mortgage tax deduction into a mortgage tax credit.

Using our example scenarios with a purchase price of $325,000, your final tax credit will come in no less than $2,000.

Using the 2018 home owner example, your annual tax liability before a mortgage credit certificate would was $8,610.

The MCC program allows you to apply that $2,000 mortgage tax credit to your tax liability. Your new 2018 tax liability has will now be dropped to $6,610!

Expert Advice for Saving EVEN MORE

Mortgage Tax Deductions vs Standard Deduction

In the above scenario, if your mortgage tax deductions are the only tax deductions are claiming, a home owner couple filing married would be better off NOT writing off your mortgage tax deductions.  With the married standard deduction is $24,000, and your mortgage tax deductions only total $21

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Adjust W9 Tax Withholding Form

You can adjust your IRS W9 form which tells your employer how much taxes to deduct from your pay check each pay period.

Consult a professional tax preparer or tax consultant to get expert advice about how to change your withholdings from number of dependents to a percentage of each pay check.

• This may reduce your tax refund at the end of the year, because you will stop lending your money for free to the government.
• You will take home more money each month by paying just enough to cover your estimated taxes from each pay check.

Apply Savings to Pay Off Mortgage Early

Let’s use our sample home loan of $300,000.

Using the “homeowner” tax savings of $877.50 a month for a married tax filer in 2018, how much would you save by applying only $500 of that toward the principal balance each month?

By adding only $500 of this savings to the principal balance of your mortgage every month, you will pay your mortgage off 11 year early!

Your mortgage will be paid off in 16 years!  Over this 16 years, at $500 a month, you would have paid down your loan balance by $96,000 which will save you $168,000 of interest!

Having Fund With the Numbers

Here’s another fun way to look at the numbers. Take your monthly tax savings from owning a home in 2018, and deduct that from your mortgage payment (principal and interest).  You probably just cut your housing payment by 50% or more!

Having MORE Fun With the Numbers

Using our example home buyer, if you DID NOT own a home in 2018, you would be paying $12,530 more in taxes over the next 12 months.

• What if you could save that money each month? 

Over the next 12 months, you would have saved more than 3.5% down payment on a home that costs $325,000. That’s something to think about, right?

Work with a Mortgage Expert

Many people think that finding the best lender is the key to getting the best deal.  The truth is, most lenders offer the same loan programs.

The most important decision you have to make is choosing a loan officer that has experience with first time home buyers, and is an expert at maximizing your long term wealth.

What most home buyers don’t realize is, your options are limited to the experience and expertise of your loan officer.

It’s important that you understand the difference between working with a professional, and getting tricked into working with a mortgage call center.

The difference is drastic.  You will not hear this type of conversation coming from a call center.  You’ll just be pushed to complete a loan application and maybe even your credit card!

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Mortgage Broker vs Direct Mortgage Lender

A mortgage broker works with many different investors, and has the ability to place you with a lender that offers the best rates and terms for your exact scenario.

A direct lender, and those big box lenders that advertise on TV, radio and the internet have one set of loan programs with one set of interest rates.

When using a direct lender, you get what you get, and you have to fit into the lender’s single set of guidelines.  There are no options if you do not fit into their box.

It is also common that mortgage brokers offer lower interest rates and fees, because they do not have the same amount of overhead that big direct lenders have.

You can also expect that if you hear about a mortgage lender on TV, that they are spending major bucks on advertising….who’s paying for that?  You guessed it.  You are.

Get Expert Advice

If you have any questions about finding a mortgage expert, we’re here to help.  Our Expert Network is made up of seasoned loan officers that specialize in solving mortgage problems for a living.

This is your chance to speak to a professional loan officer at no cost, with no obligation, and get expert advice about your options.

You can either ask a question here, or leave a comment below.  We’re happy to help!