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Tax Savings Calculator.

No doubt about it, the costs of buying a home can be astronomical. You should realize, though, that you stand to save a good amount in taxes after you begin to make deductible interest and property tax payments. For a particular home, enter the property value, loan amount, annual interest rate, loan term in years, and so on. Then include closing costs, property tax rate, your state and federal tax rate, and the number of years you wish to calculate a savings for.

Click on “Calculate Tax Savings,” and you’ll see the monthly principal and interest payment for your home purchase. You’ll also see your deductions and the longterm capital gains over the period of time you indicated. Click on “Annual Savings Report,” and a new browser window will open with a printable report.

Loan Information

Loan amount:
Annual interest rate (APR %): SEE BEST RATES
Loan term (years):
Discount points:
Origination points:
Other loan closing costs:
property mortgage insurance (PMI %):

About Your Property

Property value:
Annual property tax:
Monthly HOA fees:
Annual homeowners insurance:
Annual property maintenance:
Number of years before selling property:
Annual property appreciation (%):
Real estate agent commission rate (%):
Other costs of selling your home:

Equivalent Rental

Monthly rent:
Annual rent price inflation (%):
Monthly rental insurance:

About Your Income Taxes

Your federal income tax rate (%):
Your state income tax rate (%):
Filing status


Total Rental vs Purchase Expenses

Monthly principal and interest payment:
Sum of monthly mortgage payments with property taxes, insurance, etc.:
Total cost of renting an equivalent property:
Cost difference between buying & renting:

Annual Income Tax Deductions

Annual property tax amount:
Average annual interest expense:
Average annual deduction (points, interest, property taxes):
Standard annual deduction:
Is your average deduction greater than the standard deduction?
Income tax savings for entered period:

Longterm Capital Appreciation

Value of home when sold:
Cost of selling home:
Longterm capital gains:


Explore Great Mortgage Options

This Table helps homebuyers explore their mortgage options. You can click on the refinance button to switch away from purchase loans to refinancing options & other loan features are included in the filter section which let you change the loan amount, the home's location, the downpayment on the home, the loan term & more.

 

How to Estimate Income Tax Savings from Your Mortgage

Receipts for Taxes.

Tax deductions are Uncle Sam's way of incentivizing Americans to become homeowners. Taxpayers with an ownership interest in their homes and who itemize their deductions can reduce their overall tax liability by the amount they pay in mortgage interest each year. Homeowners can also deduct property taxes and mortgage points they pay to lower the interest rate. The resultant tax savings can be substantial for some, but not all homeowners will find the deduction worthwhile. Read on to find out how you can estimate the value of your mortgage interest tax deduction simply.

Mortgage Deductions: Who Benefits?

The home mortgage interest deduction is probably the most lucrative deduction available for homeowners, offering what many see as a compelling reason to buy a home. While the tax savings are attractive, what most taxpayers don't know is that almost half of all American homeowners receive no tax benefit whatsoever from the mortgage interest deduction. Furthermore, those who do receive a tax benefit often receive far less than they expect. Forbes estimated that the deduction saved middle-class households just $51 per month in 2013.

So who actually benefits from the mortgage interest deduction (MID)? In 2012, 77 percent of the deduction's benefits went to households with incomes of $100,000 or more. Moreover, those making $200,000 or more claimed 34.6 percent of MID benefits for average household savings of $5,021 in 2012. Figures like these form the basis of the argument to change the deduction from a tax deduction to a tax credit that would give homeowners dollar-for-dollar tax relief for mortgage interest paid.

Common Misconceptions about MID

Before you crunch the numbers to estimate your tax savings, make sure you have realistic expectations. Homeowners often have two misconceptions in particular about MID that make the reality of their tax savings rather disappointing.

First, remember that you must itemize deductions in order to qualify for MID savings. To justify itemizing deductions, the total amount must exceed the standard deduction for your tax filing status. For example, single taxpayers have a standard deduction of $12,000. This means that unless the amount of the MID and other deductions exceeds $12,000, these homeowners will receive no tax benefit from paying mortgage interest. Heads of housholds get a standard deduction of $18,000 while married couples filing joint returns get a $24,000 standard deduction.

Second, don't mistake the mortgage interest tax deduction for a tax credit. A tax credit gives you a dollar-for-dollar reduction of your tax liability. In other words, receiving a $1,000 tax credit means that you pay $1,000 less in taxes. By contrast, a tax deduction reduces your taxable income and saves you only the percentage of your marginal tax bracket. For example, if you fall into the 25-percent tax bracket and receive a $1,000 mortgage interest deduction, you save $250 in taxes.

Mortgage Interest Deduction: Doing the Math

The only way to determine if the MID is worth the trouble is to do the math and estimate your annual savings. To figure out your first-year tax savings, you will need to know the following: mortgage amount, mortgage term, interest rate, federal tax rate, and state tax rate. With that information in hand, follow this step-by-step guide to estimating your MID tax savings:

  1. Calculate your annual mortgage interest expenses. Take a look at your mortgage loan statement to see how much interest you pay per month. Multiply this amount by 12 to calculate your annual interest expenses. If you are still in the process of obtaining a mortgage, ask your lender to give you an estimate of what you will pay in interest the first month.
  2. Determine your tax bracket. Consult with a tax professional or the IRS website to determine your federal tax bracket. Your bracket will depend on your income and filing status (i.e., single, married filing separately, married filing jointly, etc.) and thus can change from year to year.
  3. Multiply your annual mortgage interest expenditure by your marginal tax rate. For example, assume you pay $10,000 per year in mortgage interest and your marginal tax rate is 25 percent. Multiplying $10,000 by 0.25, you will receive tax savings of $2,500. This will give you a quick estimate of what you stand to save on your tax bill.

Example Deduction Calculations

To see the benefit of the MID, consider the table below. The table shows how much taxpayers of various filing statuses would save by itemizing their deductions and claiming mortgage interest rather than accepting the standard deduction.

This first table shows how deductions worked prior to the passage of the 2017 Tax Cuts and Jobs Act.

Taxpayer Filing Status

Standard Deduction (2014)

Value of Standard Deduction in 25% Bracket

Value of Mortgage Deduction on $12,000 in Interest Paid

Savings/Cost between Standard Deduction and Mortgage Deduction

Single

$6,200

$1,550

$3,000

$1,450

Head of Household

$9,100

$2,275

$3,000

$725

Married Filing Jointly

$12,400

$3,100

$3,000

-$100

As you can see from the table, while taxpayers with single filing status can enjoy significant savings by itemizing mortgage interest and other deductions, married couples actually stand to lose money by doing so. For this reason, many homeowners end up opting for the standard deduction, receiving no benefit from the MID. The benefits of itemizing deductions have only further reduced after the TCJA was passed.

Taxpayer Filing Status

Standard Deduction (2018)

Value of Standard Deduction in 25% Bracket

Value of Mortgage Deduction on $24,000 in Interest Paid

Savings/Cost between Standard Deduction and Mortgage Deduction

Single

$12,000

$3,000

$6,000

$3,000

Head of Household

$18,000

$4,500

$6,000

$1,500

Married Filing Jointly

$24,000

$6,000

$6,000

$0

An individual would need to pay over $1,000 a month in mortgage interest for the deduction to become economical in isolation.

Married couples needs to pay over $2,000 a month in mortgage interest for the deduction to become economical in isolation.

Prior to the 2017 TCJA state & local tax payments (including state income taxes & local property taxes) could be written off in full. Now those write offs are limited to $10,000 total per year.

Further, the mortgage debt limit for interest deductibility was reduced from $1,000,000 to $750,000 for married couples filing jointly & $375,000 for individuals.

With current mortgage interest rates at around 5% this would put the maximum possible mortgage interest deduction at around $18,625 for individuals and $37,250 for married couples filing jointly, which is not a huge amount above the standard deduction levels. And people who can afford to carry over $750,000 of mortgage debt typically have high incomes and pay high state & local taxes that vastly exceed the $10,000 SALT limit.

The Big Tax Win in Homeownership

Longterm capital gains are taxed at lower rates than ordinary income.

In addition, homeowners may exclude up to $250,000 ($500,000 for joint filers) from income taxes provided the following is true:

  • the home was your primary residence
  • you owned the property for multiple years in the preceeding 5-year period
  • you have not used the exclusion on another home in the past 2 years
  • you did not buy the home through a 1031 like-kind exchange
  • you are not subject to expatriation tax

Any costs which went into improving the dwelling adjust your cost basis upward. For example, if a home cost $300,000 and you invested $50,000 into an expansion the cost basis of the property would be $350,000.

This would mean (if you satisfy the above criteria) an individual could sell that same home for up to $600,000 with no tax obligation & a married couple would only owe taxes if the property sold for more than $850,000. If the house sold above those levels then one would only pay the lower capital gains tax rate on the portion which is above that limit.

Read IRS Publication 523, Selling Your Home for more information & be sure to consult with a financial advisor before making major financial decisions.

Tax Strategies for Homeowners

Once you've crunched the numbers, you can see that you receive only pennies for every dollar you spend on home mortgage interest. Consequently, it's not financially expedient for most homeowners to squander thousands of dollars on mortgage interest every year in the name of tax savings.

Instead, most homeowners would receive a larger financial benefit from making a bigger cash payment up front. More cash up front means thousands of dollars saved in interest down the road. You will also avoid PMI (private mortgage insurance) premiums by making a down payment of at least 20 percent, and many lenders are more inclined to offer lower interest rates to borrowers with large down payments.

Knowing how to estimate your tax savings from mortgage interest will help you make an informed decision about whether buying a home is the most financially expedient option for you. Following the steps here will also reveal whether the standard deduction or itemized deductions will save you the most on next year's tax bill. Whatever your tax savings, keep in mind that it still makes the most sense to minimize the interest you pay on any loan, including mortgages.