Last week I wrote a post that stated that the new tax plan proposed by President Trump will be harmful to homeowners. The premise was that by doubling the standard deduction, homeowners would miss out on the mortgage interest and real estate tax deductions, thus negating a principal financial benefit of owning a home. Now, let’s look at this from the other side.
I recently read a report that states that approximately two thirds of all taxpayers in this great country of ours do not itemize their deductions. Rather they simply take the standard deductions. By taking the standard deduction under the new tax plan and not itemizing deductions, those deductions have no value to these people, and the standard deduction will benefit these people. The report goes on to say that the people who benefit from deducting their mortgage interest and real estate taxes are the high income earners – not the average home owner.
Where the new tax plan does offer a benefit is that married filers who earn under $50,000 per year will pay zero. This would save this theoretical couple $12,500 from the 2016 tax rate. This amount of savings would be a sufficient down payment for an FHA loan for a purchase of a house for $400,000. This will allow many many people the ability to purchase a home and escape the trap of renting.
AS an example – a couple purchases a home for $400,000. With a 20% down payment, they finance $320,000. At 4.2%, their mortgage interest for the first year is $13,336. Let’s assume the real estate taxes are $8000. If their income is $75,000 per year, their standard deduction, under the new plan, will be $25,400. The standard deduction will be more than if they itemized their deductions for mortgage interest and real estate taxes.
Please bear in mind that this plan has not been passed, just proposed. It may not get enacted into law as it is, and will probably be modified.
Just a note, I am not an accountant. Please speak with your accountant or your financial adviser before making any decision based upon what I am writing.