Author Topic: Looking for some clarification on tax benefits  (Read 3014 times)

ethilo

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Looking for some clarification on tax benefits
« on: October 08, 2014, 03:42:25 PM »
Hey all,
New prospective home-owner here. I have some simple questions for you homeowners out there:

I know that some things are "tax deductible" and I just wanted to know how that manifests each year. So far, I've been a full-time student my whole life (just graduated medical school last year, woo!) and therefore I don't know how tax deductible things work because I never really have had to file or pay taxes as a full-time student. With that in mind, when I own a home, do I make monthly payments to the lender for the mortgage interest and principle, then get it all back in a tax return check after I file my taxes that year? Is that how a tax deduction manifests? Also, what taxes does it apply to, your federal only or also state income taxes? (I live in Portland, OR if that matters).

Also, are homeowners insurance, HOA dues, and porperty taxes included in the tax deduction?

Here are the extra details about my potential purchase that may/may not help supplement my question. I currently am thinking about putting in an offer on a new home. I was pre-approved for $310k, looking at a townhouse that is on the market for $282k right now.

I talked to my realtor and he estimates my avg monthly expenses to be...
~$1000 in mortgage payment
$50 Homeowners insurance
$30 HOA dues
$350 Taxes
Making it approx $1380/mo in costs. I could go more into detail about my loan type and current situation and all, but what my real question is...


Thanks!!
-Evan

Cheddar Stacker

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Re: Looking for some clarification on tax benefits
« Reply #1 on: October 08, 2014, 03:56:34 PM »
Insurance and HOA are not deductible unless it's a business (i.e.- rental property).

Taxes are deductible. You need to split the mortgage payment into principal and interest. Principal is repayment of the debt and not deductible. Interest is deductible.

So, you have mortgage interest and real estate taxes. They go on a Schedule A (A list of all your itemized deductions) and the total itemized deductions should be compared to the standard deduction which is $6,200 for a single filer in 2014. You should use whichever one is bigger.

Since you're a doctor, you will likely have high income. This leads to high taxes, including state taxes. I don't know Oregon state taxes, but if you're making $200K and paying $15K tax to Oregon, you get to deduct those taxes as well on Schedule A. That alone will allow you to itemize.

You won't receive all of your deductions back, they reduce your taxable income. If you are in the 25% tax bracket, you'll roughly get 25% back. So if you pay $10K in mortgage interest, you would get $2,500 of it subsidized by the government.

Also, since you're a doc you should check out whitecoatinvestor.com for doctor specific personal finance guidance. Keep reading here as well, but that should be a great site for you.

johnhenry

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Re: Looking for some clarification on tax benefits
« Reply #2 on: October 08, 2014, 04:03:28 PM »
Hey all,
New prospective home-owner here. I have some simple questions for you homeowners out there:

I know that some things are "tax deductible" and I just wanted to know how that manifests each year. So far, I've been a full-time student my whole life (just graduated medical school last year, woo!) and therefore I don't know how tax deductible things work because I never really have had to file or pay taxes as a full-time student. With that in mind, when I own a home, do I make monthly payments to the lender for the mortgage interest and principle, then get it all back in a tax return check after I file my taxes that year? Is that how a tax deduction manifests? Also, what taxes does it apply to, your federal only or also state income taxes? (I live in Portland, OR if that matters).

Also, are homeowners insurance, HOA dues, and porperty taxes included in the tax deduction?

Here are the extra details about my potential purchase that may/may not help supplement my question. I currently am thinking about putting in an offer on a new home. I was pre-approved for $310k, looking at a townhouse that is on the market for $282k right now.

I talked to my realtor and he estimates my avg monthly expenses to be...
~$1000 in mortgage payment
$50 Homeowners insurance
$30 HOA dues
$350 Taxes
Making it approx $1380/mo in costs. I could go more into detail about my loan type and current situation and all, but what my real question is...


Thanks!!
-Evan

I remember being in your shoes before I was a homeowner.  Lots of talk out there about tax deductions for interest expense, etc.  It's hard to put together all the variables until you've gone through the process of filing your taxes on your own and either itemizing, or at least adding up your items to see if it makes sense to itemize.  I would recommend signing up for taxslayer or some other online tax filing service and just starting putting in your actual numbers.  Use your info from last year, so you have ALL of the info and aren't leaving anything out.  Then run another scenario by going back and saying that you are a homeowner, and enter your line items for RE taxes, mortgage interest.  That's the best way to see exactly how much a home purchase will affect your tax burden.  Even if you pay to have your taxes done, I think it's worth the $10 or $15 fee to sign up to e-file so you can run different scenarios. 

I can tell you, in general, for those of us who live in low cost of living areas and don't spend much of our income on a mortgage payment, the tax benefit to owning is non-existent because the itemized deductions don't add up to more than the standard deduction.  Hope that helps some.


NoraLenderbee

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Re: Looking for some clarification on tax benefits
« Reply #3 on: October 08, 2014, 04:08:27 PM »
+1 to Cheddar.

The mortgage company will send you a form in January or February that states how much mortgage interest you paid in the preceding tax year. That's the amount you can deduct.

Google for loan amortization or mortgage amortization calculators. These let you enter a mortgage amount, an interest rate, and the term (30 years, 15 years, etc). It calculates the monthly payments for you and shows how much of each payment is principal and how much is interest. You can't deduct principal payments.

When you have a specific house or a specific area in mind, you or your realtor should look up the county records to see what the neighbors actually pay in property taxes. You can call insurance companies to get quotes for the insurance. Don't take your realtor's estimate too literally--verify.

SwordGuy

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Re: Looking for some clarification on tax benefits
« Reply #4 on: October 08, 2014, 06:48:41 PM »
Do you have student loans?  If so, I suggest you continue to live like a college student for two or three years and get a house for (mostly) cash.

There are a  lot of foreclosures and if you aren't in a hurry to buy you can find a real bargain.

Second, some of those monthly numbers sound REALLY low.   You should price them out yourself.

Third, I would never live in a property subject to an HOAs authority over me.   You might want to get a copy of the HOA rules and see if your neighbors have the legal authority to assess you for large chunks of cash or keep you from using the property the way you want to.

Third, I don't know what part of the country you are in, but in most of the country you can get a very nice home for half that amount (or less).   If you want to be able to be financially independent at a youngish age, you're setting yourself up to work a whole lot harder than you have to.

ethilo

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Re: Looking for some clarification on tax benefits
« Reply #5 on: October 08, 2014, 11:10:14 PM »
Hey all,
Thanks for your advice/help. I had heard of the white coat investor book before. I already read through a similar one but heard good things about this one as well, so I went ahead and bought a copy (I'll pass it around when I'm done with it).

I am going to look at some numbers some more but think it wise to not rush into anything yet. I am finally just opening up a roth IRA and putting money into a 403b this year, so I'm just kind of starting to build my cash flow. Maybe jumping on a house without a firm investment foundation into other areas is jumping the gun a bit. I'm still kind of tinkering around with my philosophy around $, I can feel mental pendulum swinging towards not treating my personal home as a money-making strategy. I've got enough other areas I could set up nicely before getting a house in the mix too.

Despite living very mustachian, my career path to medicine has put me in $300K of debt from med school loans. However, there are all sorts of ways the government and lenders try to help new-time physicians out, including giving us access to a mortgage option of 5% down unseasoned with no PMI and really great rates (like around 3.25% on 5:1 ARM). It makes buying a house very tempting.

I've got a pretty nice set of roommates now and low rent for Portland's standards and my neighborhood. Probably best to lay low, bite the bullet, and keep renting through residency while focusing on other investments.

waltworks

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Re: Looking for some clarification on tax benefits
« Reply #6 on: October 08, 2014, 11:56:24 PM »
Oh, jeez. Don't buy a house as a resident. Good lord.

Invest like mad and (assuming you're not planning to do some kind of academic/underserved position where you'll get some debt forgiveness at some point) kill the student debt like mad. Worry about houses much, much later.

-W

Ybserp

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Re: Looking for some clarification on tax benefits
« Reply #7 on: October 09, 2014, 07:47:50 AM »
In case the tax words are confusing you, here's some general explanations of what the phrases mean:

TAX DEDUCTION - You get to not count this spending as part of your income.

TAX DEDUCTION Example 1: You claim the standard deduction for Married Filing Jointly of $12,400 for 2014. This deduction means you don't pay federal income taxes on $12,400 of the pay you and your spouse receive. If you didn't have this deduction and you were in the 15% federal income tax bracket, you would have paid $1,860 more in federal income taxes.

TAX DEDUCTION Example 2: You choose to itemize your deductions to claim a Mortgage Interest Deduction on $15,000 in interest payments. You *do not* claim the standard deduction, because you have to choose between the standard deduction and itemizing on your federal income taxes. Buy paying the bank $15,000 interest plus your principle/insurance/property-tax payments, you get charged $2,250 less on your federal income taxes. BUT you had to pay $15,000 in interest plus the other payments which might have been more than rent and you only got a $390 lower tax bill than if you had kept your interest money and used the standard deduction.

***UNASKED FOR OPINION***
Part I: I think a seeking a tax deduction is not a good way to make financial decisions. You generally have to spend more money than the tax deduction gives you to get the option of taking the deduction. Instead tax deductions are nice, small bonus for things you already do.

Part II: That said, I have a mortgage. It was a good idea for me for other than tax deduction reasons. The deduction is just a nice extra.

TAX CREDIT: A flat out gift from the federal government to encourage certain behaviors.

TAX CREDIT example: You are eligible for the Earned Income Tax Credit in 2014. You take it. The federal government gives you the full amount of the credit. (You were eligible because you are married filing jointly with no kids and have an adjusted gross income of $20,020 or less in 2014. So you get a gift of $496. No, you are not in the 15% tax bracket in this case.)

Ybserp

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Re: Looking for some clarification on tax benefits
« Reply #8 on: October 09, 2014, 08:06:21 AM »
@ethilo

If you have a trust fund and the earnings on it put you in the 39.5% federal income tax bracket, the value of a deduction goes up a lot. Especially if you don't have access to the money but need to pay taxes on it, it because really important to optimize the other financial choices you do control. It just very few people are in that situation. And if you are dealing with taxes that high, you need to be aware that some income tax deductions have phases out where they simply cannot be claimed by you when your adjusted gross income is above a certain level.

If you are in that kind of situation, I hope whichever relative put you there will pay for a CPA to help you learn how to deal with it. The general public is mostly unsympathetic to that level of problem.

If you have an impression that mortgage interest deductions are extremely valuable, it could be because people (parents perhaps or highly-compensated medical school faculty) have said so in front of you. Those people may be in the upper tax brackets. It can be very valuable for them right now while still being essentially useless to you right now.