How much are income tax breaks for homeowners really worth?
First-time home buyers and those planning to move up to more expensive houses often count on the deductibility of mortgage interest and real estate taxes to help them afford their purchases. The extra cost isn't so bad, the thinking goes, if Uncle Sam picks up part of the tab.
However, the savings can be less than you expect if you haven't previously itemized deductions on your tax return. Most taxpayers simply take the standard deduction, which for 2004 returns will be $4,850 for someone filing as single, $7,150 for head of household and $9,700 for married filing jointly. Taxpayers over 65 add $950 each if they are married or $1,150 if they are single.
You won't get any tax benefit from home ownership unless your total itemized deductions are more than your standard deduction would be. Even then, your gain is the difference between the total of your itemized deductions and the standard deduction that you'll be giving up.
For example, a married couple with $8,000 in mortgage interest and real estate taxes won't get to deduct a penny unless they also have more than $1,700 in other deductions, such as charitable contributions. A couple with $10,000 in itemized deductions is only gaining an extra $300 in deductions, worth all of $75 if they are in the 25 percent tax bracket.
Low tax brackets also devalue deductions. In the 10 percent bracket, your tax savings are only 10 cents on a dollar of deductions. At the opposite end of the spectrum, upper-income taxpayers have their itemized deductions reduced by the tax law, starting at taxable incomes of $142,700.
This isn't to say home ownership is a poor investment. Even if there were no tax benefits, I'd be glad I own my home. But if you are planning to buy, take a close look at the numbers before making any assumptions about how much you'll save in taxes.
Q. What should I do with the proceeds from the sale of my house? I just retired at 64, rolled over my 403b to an IRA and have a few other investments that haven't done that well, but which I hope will help supplement Social Security. I am now renting, but I may want to buy a modest house or condo in a year, so I would like to keep at least some assets from the sale of my house liquid. Should I invest in an annuity, an IRA or just a regular mutual fund? Or is there another option? I have about $82,000 to invest after paying off my MasterCard.
If you are not knowledgeable about investing, and maybe even if you are, it probably will be difficult for you to earn a better return on your money than the interest rate you will pay on the mortgage. I suggest you use most of this extra money to reduce the size of the mortgage you will need when you buy your next home.
Any money that you might want to use in the next few years should not be in an annuity, a stock fund or even most bond funds. Short-term needs require short-term investments. The proceeds from the sale of your house are not eligible for rollover to an IRA.
You might put part of your money into EE U.S. savings bonds, which can be cashed any time after 12 months. They pay a market-based interest rate (currently 2.84 percent), with a three-month interest penalty if you cash them earlier than five years. You are limited to a $30,000 investment in any calendar year. Other safe, short-term alternatives include bank high-yield checking or money-market accounts and short-term CDs. (See the highest yields charts that appear in the Times Wednesday and Sunday.)
Note to readers: So-called "phishing" e-mail scams are multiplying like crazy, but I still hear from readers who have received one for the first time. These e-mails appear to be from legitimate companies, often from a bank or credit card issuer, and direct you to click on a link in the e-mail. Typically they say you need to do that to verify your account, keep your account from being suspended or prevent charges to your account. The proper response: Never, ever click on a link in an e-mail regarding a financial account. When in doubt, call the customer service number on your statement.
Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
