Estimating your tax benefit accurately is an important step
in determining how much your new home is really going to cost.
Because issues such as the alternative minimum tax, deductions, and tax law changes may affect the amount of your tax savings when you itemize mortgage interest and property taxes, online tax-benefit calculators can be very misleading.
A more accurate way to estimate your tax savings
If you prepare your own taxes, open your tax prep software, open your last return and save a new copy of that return that you can modify. Following your software prompts, enter the amounts from ‘Total mortgage interest paid first year’ and ‘Annual property taxes paid’ from the calculator into the saved return; these are line 10 and line 6 on the Schedule A of the 1040. Calculate your tax liability after entering these numbers, and note how much lower it is, federal and state, than it was on your original filed returns. That difference represents your tax savings if you buy. Divide that difference by 12, and subtract that number from the estimate of ‘Total monthly housing expense’ on the calculator. This is your approximate after-tax monthly housing expense, the so-called ‘rental equivalent’. If your income has increased since the old return was filed, you can also change that on the modified return, to give you an even more accurate estimate of your tax situation after you buy.
If you don’t prepare your own returns, your tax preparer should be able to open your last return and quickly drop the numbers from the calculator into your previous return and tell you how much your tax savings would have been had you owned the home that year.
Again, remember that these are estimates, and that it is always prudent to have the advice of a professional tax adviser when looking at tax issues.