Don't Bet on Income Tax Breaks, Home Buyer

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.

A:

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.

We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!

Fred and Gloria Pollard

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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.

Source: sptimes.com 09-05-2004