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How much of the mortgage payment is for interest and how much is for principal?
Also, do you file your taxes as single or married? Do you have any children or other dependents to claim?
Hello again Customer,
Yes you are correct that in the early years of a mortgage, most of the payment goes towards the interest, but it really depends on the entire amount you are financing and the length of time that the loan is being amortized (15 years, 20 years, 30 years, etc.) so it would make a big difference in what the interest amount might actually be.
However, from what you have told up to this point, it sounds like basically you now have taxable income of around $59,000 per year. You would be allowed one personal exemption for yourself of $3,500, bringing that down to $55,500. In order to take advantage of deducting interest paid on a home mortgage, you would need to itemize your deductions on Schedule A rather than claiming the standard deduction. The standard deduction allowed is $5,450, so you have to figure that you would be allowed that deduction regardless of whether or not you purchase a home. That being said, you would really have to figure out just how much your itemized deductions exceed what your standard deduction would be, to see how much additional you are able to deduct as a result of this mortgage interest. You would of course also be allowed to deduct your property taxes paid on the home.
Basically right now your top tax bracket is 25%. So as an example - if you buy a home and start itemizing your deductions and lets say they come to $10,450. Your standard deduction would be $5,450 so you have a net increase of $5,000 more in deductions. Your tax savings in your bracket would be 25% of that amount, or $1,250 for the year.
You really need to find out just how much of that mortgage payment is interest and also take into account your property taxes and other deductions which you can itemize.
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How much is the total amount you are planning to finance?
You say you have income from retirement. Is that from social security or a private retirement plan?
Are any of your current earnings from employment wages?
If you are taking out a loan for $480,000 for 30 years at a rate of 6.2%, then your interest is going to be quite high. Just for the first 10 years alone, your annual interest is going to range from around $29,000 the first year and ten years later will still be around $25,000. In addition you get to deduct your property taxes on the home, and of course any other itemized deductions which you may be entitled to. That would include such things as a portion of your medical expenses, state income taxes paid, etc.
So if your taxable income is really only $28,476 for the year, then by the time you take your personal exemption of $3,500 and then your itemized deductions, you are going to actually end up with a loss for the year and would owe no taxes at all.
Are they currently withholding any taxes from your civil service retirement?
Yes, you are exactly correct. Once your deductions exceed your income you are not liable for any tax. But at the same time it does not qualify you for a tax refund if you never paid in taxes to begin with.
There are certain individuals who qualify for what is called the Earned Income Credit, but that is basically for taxpayers who earn much less than what you do, and their income has to be from wages, not retirement income, so you would not qualify for that credit, and therefore would not receive a refund of any kind.
Thank you frank,
Good luck in deciding what to do here.