Homeowner Tax Tip: How to Take More Money Home
Almost every wage earner remembers the first paycheck they brought home from their first job. The feeling most of us felt was a foreign blend of excitement and pride, mixed with shock and horror at the amount of hard-earned funds that were siphoned off the top by some unheard-of monster going by the initials FICA and his buddies -- an array of taxes and various other withholdings. Over time, most of us have grown accustomed to seeing (or, rather not seeing) these funds come out of every check. We align our monthly budgets to our after-tax income, understanding that only so much of our gross income will ever make it into our hot little hands.
Smart homebuyers often determine their maximum home purchase price based on what monthly mortgage payment makes sense for their budget. The problem is, too many would-be homeowners forget to take the tax advantages of homeownership into consideration when determining what they can afford to spend monthly on their future mortgage. Savvy homebuyers often fail to factor in the decreased amount of money they will need their employer to withhold from their paycheck to break even with the IRS at years’ end, given all the tax advantages of homeownership.
Payroll withholding is a process through which your employer deducts a portion of your pay every pay period and sends the funds to the IRS, which credits the monies toward your eventual year-end tax bill. Every taxpayer’s goal should be to have their withholdings come as close as possible to the actual amount of taxes they owe -- no more and no less. If you have too little money withheld, you end up with a tax bill you have to pay out of pocket on April 15th. If too much is withheld, you get a refund check, which sounds nice but actually signifies that you allowed the federal government to use your money interest-free all year, when you could have been bringing it home or even stacked it in an interest-bearing savings account -- or even using it to pay your mortgage or other expenses of homeownership -- during the year.
Homeowners are allowed major tax deductions not given to renters. When a renter transitions to a homeowner, their entire tax situation changes; payroll withholdings should also be reexamined and, perhaps, reduced to account for the reduction in net tax liability. The change in withholdings allows the new homeowner to bring more money home every pay period, leaving more net income to use for paying the mortgage and other costs of homeownership!
If you’re struggling to find a place you like within your price range, seek out some tax advice about how you may be able to reduce the amount withheld from your paycheck for taxes, in light of your projected post-homeownership tax liability. It’s not so simple as figuring your mortgage interest; rather, that calculation must take your income, your tax rate and your other deductions into consideration to be accurate, so that you don’t end up having too much or too little withheld. Talk to your tax preparer or use the IRS withholding calculator, to get the numbers right. Submit a new W-4 form to your employer, which will send more money home with you every month. Then, restart your house hunt with your newly enhanced purchasing power!
NOTE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.