mortgage interest and tax?

Question

I'm a first time home buyer, so I'm not clear on how the mortgage loan interest deductible works.

For example, if I pay $6000 federal tax per year and the mortage loan interest is $9600 per year, do I get $6000 back when I file tax? Or $9600 is simply deducted from my annual gross income when I file tax?

Answer 1

Congratulations on becoming a first time home buyer!

Up to this point, when you did your taxes, you probably simply used your Standard Deduction and did not fill out a Schedule A. The Schedule A lists items that the IRS will allow you to subtract from your income to arrive at your taxable income. It includes (among other items):

mortgage interest (interest only, not principle)
state income taxes paid
real estate taxes
donations to charity

When added together, if the amount comes to less than your standard deduction (which is probably what was happening each year you filed your taxes so far), you simply take the standard deduction and pitch the Schedule A. When the Schedule A is more than the standard deduction, you include it with your 1040.

Again, the amount on Schedule A lowers your taxable income dollar for dollar. It does NOT lower your tax liability dollar for dollar. In other words, if you paid $1000 in interest, you don't save $1000 in federal income tax. What you actually save depends on your tax bracket. If you are in the 25% bracket, you save $250. If you are in the 15% bracket, you save $150. Other things can affect your tax liability, so until you actually do your taxes, you won't know 100% for sure, so take this advice as a guideline.

Again, congrats on the home! If nothing else, you are saving from paying rent and you are building equity.

(after rereading your question, allow me to say that technically, anything on Schedule A does NOT lower your AGI. Your AGI is calculated before your Schedule A is subtracted. But, your Schedule A does lower your taxable income before your taxes are calculated.)

Answer 2

You add up all your allowable itemized deductions - the house tax and interest, state and local taxes, plus contributions to charities recognized by the IRS, and some other items - medical expenses only can be deducted for the amount that exceeds 7.5% of your income, which most people don't have unless they've had a real bad year for medical bills.

Since you would get a standard deduction anyway, the only part of the itemized amount that saves you any taxes is the part that's higher than your standard deduction, which was $5000 last year if you're single, $10,000 ir married filing joint (will be a little higher this year but not much). You take standard or itemized deductions, whichever is higher. Your taxable income will be lower by that difference. You're refund will be higher by a percentage of that difference, depending on your tax bracket, probably 15% or 25%.

Answer 3

The $9600 is deducted from you AGI...You also get to deduct the property tax...You will lose the standard deduction, since you must choose either the standard deduction or itemized...Oh yeah you'll be able to deduct state income tax...So depending upon your income tax bracket it can be anywhere from 10% to 35%...You'll also get to deduct the interest and property tax off your state income tax.

Answer 4

The interest and taxes you paid are deducted from your adjusted gross income not the taxes you paid.

Answer 5

It is deducted from your tax bill. You get the $6000 (or up to $9600) back that year. Don't forget you get to deduct your points and closing costs too.