“I saw a lot of (incorrect) comments above regarding how much tax “savings” there are in the case outlined by CAR: $132K income, $690K house, $4420 monthly payment, 5.69% rate, 10% down. So I decided to do a quick scenario analysis.
I assumed a married couple (joint filer), with no dependents. At $132K income, the tax savings are $1,030 per month. That’s it. Once again, the idea that one can deflate a house payment by a marginal tax rate is wrong, wrong, wrong. Especially wrong at the relatively low income level of $132K (relative to $46K of deductible interest and prop tax).”
San Francisco Affordability: Is C.A.R.’s New Reality Already Old? [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by anon

    “Once again, the idea that one can deflate a house payment by a marginal tax rate is wrong, wrong, wrong.”
    =====
    The above statement is not correct in many instances and splitting hairs in other instances.
    By definition a deduction lowers income starting at the top tax rate. A joint married HH with 200k income and 40k mortgage interest gets the full federal benefit of 28% of the 40k (because their income effectively is reduced from $200k to $160k). This is a $11,200 benefit, which reflects the full benefit of the marginal tax rate.
    If they earned $150,450 and paid 40k in interest, half of the interest would lower taxes at the 28% rate and another half would be at the 25% rate. So the effective blended benefit is 26.5% instead of 28%. This is a 10,600 benefit, a measly $50 a month difference from the 28% rate above.
    Refer to Tax Rate Rate Schedule Y-1:
    25% on the income between $65,100 and $131,450; plus $8,962.50
    28% on the income between $131,450 and $200,300; plus $25,550.00
    ——
    One thing I learned from working for many years with one of the top 10 wealthiest families in the U.S. is that it is all about building assets and aggressively finding ways to minimize taxes (legally of course).

  2. Posted by unearthly

    Long term capitol gains and dividends are taxed at 15%. That’s the top tax bracket for the wealthy.

  3. Posted by Tom

    I believe what Satchel (and SS) is trying to point out is that the tax burden when taking the mortgage interest deduction needs to be compared against the tax burden without the mortgage interest deduction but when taking the standard deduction (i.e., to use one deduction you forego the benefit of the other).
    The tax saving is the difference between using the mortgage deduction and using the standard deduction, not the difference between using the mortgage deduction and using nothing (as calculated by anon above).

  4. Posted by Satchel

    anon (10:08 AM) is wrong here on his analysis, both conceptually and in practice. I had hoped someone would have jumped in here and corrected it by now!
    Later today (when I have time) I’ll point out where anon has gone wrong, if no one else will have stepped up to the plate by then. It’s an important topic, and one the fraudsters in the RE industry LOVE to “muddy up”. As the bard said, “Once more unto the breach, dear friends, once more,….Stiffen the sinews, summon up the blood.”
    Hopefully someone else will spare me having to act like my usual pedantic self and point out why family mega-wealth advisers shouldn’t try to generalize their ezperience to our “peasant” experience regarding the tribute that is siphoned off from us by TPTB, and the devious ways in which that tribute is calculated.

  5. Posted by unto the breach

    When I did this calc. for my own HH a few weeks ago, I did it thusly:
    assume joint gross HH income = $255k (we don’t have any itemizations)
    I assumed a 700K loan @ 6.5% 30yr. fixed
    I looked up amortization tables to come up with a 10-year avg. interest pymt. (b/c it decreases every yr.) This provided a 10-yr. avg. mort. int. deduction, which I subtracted from gross HH income to find taxable income (“TI”) and applied the appropriate marginal taxrate. This became “example A”
    I looked up our married joint std. deduction, subtracted it from gross HH income to find our taxable income (“TI”), and applied that to the corresponding tax rate for “example B”. (there are calcualtors on the web to do this)
    (Also, in both ex. A and ex. B I added property tax (1.25% of $775,000) to the deduction.)
    The diff. between ex. A and ex. B was a little over $1000.
    Our rent is $3175; but PITI+maintenence for a used $775,000 home (in Lafayette) with 10% down is more than $3175+$1000.

  6. Posted by enonymous

    i hope anon at 10:08 was kidding because he isn’t even close

  7. Posted by 1st time buyer

    I hate to throw a wrench into the already complicated works, but how does AMT impact the mortgage deduction?

  8. Posted by Satchel

    Well, I can’t give an exegesis here on where anon went wrong, even if Government has become our God and the Internal Revenue Code our Bible (together with an entire industry who makes its living dispensing its interpretations of the Great Book).
    But conceptually, two things really stand out in anon’s analysis.
    First, he is attempting to create an elegant algebraic solution – an analytic answer for those who are familiar with finance. One should never try this with tax filings. There are too many variables, and by the time you input all the data, you could have simply run the less elegant mechanical solution of just running the tax software with and without “house” for your personal circumstances.
    Second, anon ignores state taxes, and the interaction between state tax liability and Federal deductibility of state tax liability. So, when someone in a high tax state like California (9.3%, and relatively flat across the income spectrum) deducts his mortgage interest in CA, this deduction LOWERS his CA tax liability. This reduction in tax liability results in LOWER AVAILABILITY of the state income tax deduction that would otherwise be available had the filer not had any deductible housing expense (ie, had he rented rather than owned his house). The interaction between these factors means that IN ALL CASES WHERE THERE IS A STATE INCOME TAX the “value” of the home deductions is LESS than the marginal tax rate (Fed + state).
    Anon’s concept really doesn’t even make sense in the 7 states that don’t have an income tax, although it of course comes closer. In these states, a typical filer who doesn’t own a home will generally use the standard Federal deduction. By buying the house, the filer in the no tax state in effect foregoes the benefit supplied by the standard deduction. This has the effect of lowering the marginal value of the home deductions to below the marginal applicable Federal tax rate of the filer, which should be obvious.
    Oh, and anon also completely glossed over the phaseouts of itemized deductions that would certainly impact households over about $150K (admittedly a pretty small effect, though).
    The basic takeaway is that people NEED to do a scenario analysis, which is simple with the tax software. I was the one that supplied the original comment that it is wrong, wrong, wrong to somply deflate a house payment by your marginal rate, and in all cases that is right, right, right :) Especially in high state income tax states like California.

  9. Posted by NoeValleyJim

    I hate to throw a wrench into the already complicated works, but how does AMT impact the mortgage deduction?
    The biggest impact AMT has is that you no longer get to deduct your property tax. Other than that, not much, though it can jump your effective marginal federal rate up to 35% if you make between 150k and 325k, because of the 28% rate combined with the fact that every dollar above 150k causes you to lose 25 cents of your AMT standard deduction.
    This stuff gets really complicated and I am not a tax person, so you really should talk to an accountant or at least run the numbers through Turbo Tax.

  10. Posted by Taxed

    RE: the AMT question. Apparently, the response from NVJm is correct. If you are subject to the AMT, you can still realize the full benefit of your mortgage interest deductions, but you lose your property taxe deduction. Bummer when that’s around $10-11k on a $1m home…

  11. Posted by gRE

    There’s really no easy way around this mess other than to run both scenarios through Quicken TurboTax (free if don’t actually file) to see what the numbers come out with. It will take you through federal, state and do the AMT work too.

  12. Posted by tax-litigator

    Satchel makes a good point about the lowering of the state income tax deduction in subsequent years. Good catch. I wish more folks would do the two scenarios and see how the results compare.
    But when you do that, realize that the year *following* the year you pay lower state income tax should be used for projecting the home ownership scenario. You can’t just take last year’s withholding or even last year’s tax liability (the number used on your state income tax from which you subtract your withholdings to determine whether you get a refund or owe more tax.)
    Phase-outs of itemized deductions are minimal so don’t get too hung up on that one. It’s there, but the phase-out is quite gradual, unlike many other phase-outs on credits, etc.
    And as to the AMT, I see many of my clients lose the benefit of both their state income tax and real estate taxes paid. So if you’re subject to AMT, and you likely may be at the income levels being discussed here, the issue of lower state income tax deduction is irrelevant since it’s all backed out in the AMT calculation. But I’m still impressed with the analysis of looking at the total picture.
    You shouldn’t rely on TurboTax to tell you the real difference. The US Tax Court didn’t let Timothy Geithner get away with blaming his errors on TurboTax… “Garbage in, garbage out.”
    Use a real tax professional to help you. If he or she finds even ONE thing for you, it will pay for itself hands over. You’re dealing with tens of thousands of dollars so don’t rely on a $69 software package to give you competent professional advice specific to your own facts.
    I litigate state and federal income tax matters before the IRS and CA BOE/FTB. None of my clients would need to hire me now had they spend a few bucks before they made their bad decisions.
    Don’t be penny-wise and pound-foolish.

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