Tax season affects everyone, but while homeowners can claim the mortgage interest deduction, most renters don’t see many tax savings. Some states do have renter tax credits, but they generally provide minimal savings.
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Renters shouldn’t fret, however. Most American homeowners actually get little, if any, tax benefits from owning real estate — although many believe they do.
The Mortgage Interest Deduction amount homeowners claim on their taxes goes on their Schedule A: Itemized Deductions. Also on that form are a variety of other deductions for items such as medical expenses, property taxes, casualty losses, and gifts to charity. At the bottom of that form, taxpayers summarize all those deductions as the total Itemized Deduction.
If the sum of all those deductions is not higher than $12,400 for married couples or $6,200 for singles, the taxpayer will elect to take the free government-given Standard Deduction. In effect, they are not “itemizing” on their tax return because their total itemized deductions are not above the Standard Deduction, so they elect to take the Standard Deduction.
Taxpayers who take the Standard Deduction — estimated at up to 70 percent of Americans, many of whom are homeowners — get no actual interest deduction tax benefit from owning their home. This puts them in the same boat as renters.
With the average home in the U.S. costing around $200,000, and the average mortgage interest rate around 4.5 percent, that amounts to about $9,000 per year in mortgage interest. Since that’s over the Single Standard Deduction limit, single people might get a little tax benefit from itemizing the deduction, but it’s less than the average Married Standard Deduction limit, so married folks would probably not get any benefit.
That’s right: many Americans get little tax benefit from owning a home.
So relax, renters. You’re not missing out on any big tax break, and shouldn’t be in a rush to buy. When you have stable income, plan to stay in one place for a long time, and are ready to take on the tasks of homeownership, that’s the time to buy a home.
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