Every year, most of my clients ask how they can lower their taxes. They always ask if buying a house, or buying something for work is something that they should do. Buying a house can help to lower your taxes, however, it also lowers your bank balance!
Here are some examples, to put it in perspective:
For this example, we’ll pretend you have a typical mortgage and pay about $10,000 in interest to the bank each year.
- If you are single with no dependents, make $80,000 per year, and have no itemized deductions (if you were renting your home & have very little charitable giving for example), your effective federal tax rate (average rate) would be 15.75%, and your federal tax would be $10,417 per year.
- If you are single with no dependents, make $80,000 per year, and have no itemized deductions other than your house (using an average mortgage of $250K as an example), the results would be the same as example one, with $10,417 in federal tax per year.
- If you are single with no dependents, make $80,000 per year, owned a home (using an average mortgage of $250K as an example), & also had $5,000 in charitable contributions, your effective rate drops to 15.54 or 14.99% if you were especially charitable (10,000 in donations), which means that your federal tax would be $9,955 or $8,855 per year.
In example 2, buying a home doesn’t lower your tax at all. In example 3, buying a home & being charitable only lowers your tax by $462 or $1,562. You are essentially paying a high number in interest to lower your tax by a small amount. You ARE lowering your tax, but are not getting to keep that savings. There are of course, other things to take into consideration, like owning your home vs. renting.
I’m not saying that you shouldn’t buy a home, or donate to charity… I am just saying that you shouldn’t buy a home or donate to charity JUST to save on taxes. It’s not a dollar for dollar trade off.