Real estate tax deductions and credits, please explain the difference?

Question

Mortgage interest is tax-deductible and I heard so is PMI (private mortgage insurance), does that mean you get that money back or that it is money that isn't taxed? I have a 1200$ mortgage with a 150$ PMI cost per month. Can someone break this down?-thanks

Answer 1

You need an accountant, or try doing the Turbo Tax program, it walks you through all the steps and mentions any possible deduction. The amount you deduct when you own a house might not add up to much. You might still be better off just getting the standard deduction instead of itemizing deductions. I own a house and Turbo Tax figured out I was better off financially just taking the standard deduction.

Answer 2

Generally, a deduction means that that money is not taxed. You subtract this amount from your income before you figure how much tax you owe. Mortgage interest is usually a deduction, I think.

A tax credit is a reduction in the taxes you have to pay. That means you calculate the amount of tax you owe, and subtract the tax credit from that. It's the more valuable option of the two, I think.

Here's why: suppose you have a $100 deduction, and a $100 credit, and that you're in the 30% tax rate. That means that you'll pay 30 cents tax on every dollar you earn. Since you don't pay taxes on that last $100, it will save you $30.

The tax credit, on the other hand, is subtracted from the amount of tax you would pay on the entire amount. So the $100 credit saves you $100.

Answer 3

Deductions are subtracted from your income, lowering your taxable income. Credits are applied directly to your tax liability. PMI will be deductible on your 2007 taxes, not on your 2006. It was signed into law in February.