Does Buying A House Lower Your Tax Bracket?

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If you’re looking to buy a house to help save money on your tax bill each year, there are several ways owning a home can help.

See: Tax Brackets 2022: How Much Will You Pay Based on Latest IRS Inflation Adjustments?
Find: Why the Holidays Are a Good Time To Buy a House

The first is through itemizing your income tax deductions to reduce the amount of tax you owe.

It makes sense to do this when the itemized deductions are higher than the standard deduction, meaning the dollar amount of itemized deductions in excess of the standard deduction. This is the only part that can actually save you money. If you then multiply this excess against your marginal tax rate, you can see how much the deductions save you.

Furthermore, the amount of money you can save on taxes from owning a home largely depends on your filing status and income. A person filing single or as head of household and a married couple for example do not have the same savings from their tax deductions. The 2020 Homeowner Deductions table below shows why:

 

Single or married filing separately Married Head of household
Standard deduction $12,400 $24,800 $18,650
Itemized deductions $30,000 $30,000 $30,000
Deduction amount that benefits from itemizing $17,600 $5,200 $11,350
Additional tax savings from itemizing, 12% federal tax bracket $2,112 $624 $1,362
Additional tax savings from itemizing, 24% federal tax bracket $4,224 $1,248 $2,724
Additional tax savings from itemizing, 35% federal tax bracket $6,160 $1,820 $3,973

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Source: Forbes

So while owning a home might not necessarily drop you an entire tax bracket, you can certainly save big by making sure you itemize correctly.

In fact, mortgage interest is one of the most commonly itemized deductions, regardless of a person’s tax bracket.

The other option is for when you first take out a mortgage. At that time, you have the option to pay a portion of your interest in advance to reduce your monthly payment. The amount of interest you pay upfront is referred to as “mortgage points” and the figure is calculated as a percentage point of your loan. Mortgage interest is tax-deductible, so if your points meet certain criteria this prepaid interest payment can be deductible as well.

In order to meet these criteria, your mortgage must be secured by your home, the points must have not cost more than what is typical in your area, the points must have been paid as cash at closing via your down payment and were not in place of other closing costs, like appraisal or title fees.

See: How Do Mortgage Points Work?
Find: Which Should You Update First in Your House: Kitchen or Bathroom?

If either of the options is in play for you, it may be worth buying a home for tax purposes.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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