Does Buying a Home Always Help My Tax Return?

by Gregory Hamel, Demand Media
    Buying a house doesn't always lead to income tax savings.

    Buying a house doesn't always lead to income tax savings.

    Homeownership involves many expenses that you don't pay when you rent an apartment, such as property taxes, interest on home loans and the cost of maintaining the home. Buying a home can, however, save you money when you file your annual income tax return because many home-related expenses are tax deductible. If you buy a home, you aren't guaranteed to see savings on your tax return because the tax deductions for homeownership are "itemized deductions" which do not help all taxpayers.

    Itemized Deductions

    When you file an income tax return, tax laws let you reduce your total taxable income by subtracting all of your "itemized deductions." Several expenses related to owning a home qualify as itemized deductions, including home mortgage points paid at closing, real estate taxes and mortgage interest you pay on up to $1 million of mortgage debt. Owners of expensive homes tend to pay higher taxes and have bigger mortgages so they pay more interest. Thus, they typically stand to save more on taxes than people with less expensive homes. Other common itemized deductions include charitable donations, business expenses and certain medical and dental expenses.

    Standard Deductions

    The Internal Revenue Service grants a "standard deduction" you can use instead of the sum of your itemized deductions. According to the IRS, the standard deduction is $5,950 for single taxpayers and separate filers and $11,900 for married couples filing a joint return for the 2012 tax year. The standard deduction can change slightly from one year to the next. For example, the 2012 standard deduction for individuals is $150 higher than the 2011 deduction and the joint deduction is $300 larger.

    Choosing Your Deductions

    If all your itemized deductions are less than your standard deduction, you are better off taking the standard deduction. In this case, buying a home doesn't save you anything on your taxes. For example, if a married couple pays $3,000 a year in property taxes and $7,000 a year in mortgage interest after buying a home, the total of both itemized deductions is still less than their joint standard deduction of $11,900. If the couple doesn't have any other itemized deductions, the standard deduction saves them more on taxes.

    Zero Tax Liability

    If you have zero tax liability, buying a home won't save you money on your tax return. For example, if you have low income, many dependents or qualify for certain tax credits, you might not owe any income tax. Tax deductions reduce the amount of income that is subject to taxes, but additional deductions for homeownership may not help you if you have zero tax liability before buying the home.

    About the Author

    Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.

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