First of all, thanks to everyone who commented on the first Money Pit post! Since so many of you asked about the tax incentives for homeowners, here’s what I have to say about that: it’s a crock. I fell hook, line and sinker for this myth, and no one, not even my own parents, set me straight when I bought my home. Two full tax years later, I’m still waiting for these so-called benefits to appear. Maybe in some other market you’ll actually see a benefit, but in ho-hum Middle America, it just isn’t working.
Let’s refresh the basics:
I bought my home in Little Rock with a purchase price of $215,000 and a down payment of $10,000. My mortgage is broken up into two parts: $172,750 at 6% and $32,250 at about 11%, for a total of $205,000. My husband and I together have an annual household income of just under $70,000.
Before I bought a home, I believed everyone who told me there was an awesome tax benefit coming my way-friends, family, even random newspaper and magazine articles. None of these sources explained HOW it was possible, but they all agreed that it was. Through some strange tax code alchemy, my mortgage interest would become this awesome way of ripping off the government. Sounds good? Of course. So I went along with it.
The ugly truth:
When you prepare your taxes, you deduct the total amount of interest you paid, along with any other deductions, from your taxable income. The folks from Countrywide (assholes) tell me that this amount is approximately $10,778.90 on my first mortgage, and $2,582.30 from my second for a total of $13,361.20.
Luckily, I am able to add to this total with a few other small itemized deductions: my husband works from home so we are able to deduct a portion of our utilities commensurate with the room he uses solely for work, the amount he pays for his own health insurance, and we donated his ugly single guy furniture to Habitat for Humanity and wrote off the value of the donation. This gets our total itemized deductions up to $15,763.
The standard deduction for a married couple filing jointly is $10,900. So right off the bat, owning my home has given me $4,863 of extra tax write-offs. But don’t get excited yet-none of this represents any actual money without two things: my taxable income, and the figure from the tax table that tells me how much tax I owe for the year.
Let’s do some math, with a little help from Jackson-Hewitt (these numbers are taken directly from our prepared taxes). Our total wages are $68,181 with $4,312 in adjustments (student loan interest, moving expenses, etc.). This puts our adjusted gross income at $63,869. From this, we get to deduct our exempt amount of $6,800. Our taxable income total is now $57,069.
NON-HOMEOWNER: If we did not own a home, we would not bother itemizing. Our standard deduction for a married couple filing jointly in 2009 is $10,900. We subtract this from our current taxable income ($57,069) for a new total taxable income of $46,169. Based on our tax bracket, our tax due is $1,670 plus 15% of the amount over $16,700. This equals $6,090.35.
HOMEOWNER: Our itemized total is $15,763. We subtract this from our current taxable income ($57,069) for a new total taxable income of $41,306. We are in the same tax bracket, so our tax due is still $1,670 plus 15% of the amount over $16,700. This equals $5,360.90.
The total amount of tax I saved by being a homeowner is the difference between $6,090.35 and $5,360.90: $729.45.
Let’s pause for a moment of reflection:
I’m sitting here in stunned silence as that number stares me in the face, bold in more ways than one. I am being robbed, and it’s as if I opened the door and put out the welcome mat for the thief.
I have paid $13,361.20 in interest, $2,700 in property taxes, a year’s worth of maintenance and homeowner’s association fees, plus a year’s worth of homeowner’s insurance for the unbelievable privilege of saving $729.45? That’s the great tax savings I’m supposed to be so damn happy about? Are you freaking kidding me?
I had to deal with mice in the attic, a window broken by a freak accident, a brick mailbox plowed over and destroyed by a joyriding teenager, and all the other wonderful spur-of-the-moment surprises that YOU as a homeowner get to pay entirely out of pocket, and I’m supposed to be happy about it just because I owe $729.45 less in tax? I expended more than that this year in home maintenance alone. Great savings. Thanks a lot, Uncle Sam. Say hi to Typhoid Mary, will ya?
But the fun isn’t over. The total amount my husband and I have had withheld is $1,100 over the amount of our tax due (along with another $750 from the state of Arkansas). Our total tax refund amount is $1,850. A small consolation, but hey, we still get to play with almost two grand, right? Wrong. Our yearly property tax bill arrives at the same time as the refund, and guess what? We still have to pay out of pocket. Our property taxes are $2,700, so once I fork over the ENTIRE refund, I’m still $850 in the hole.
Now let’s jump backward for a moment. If I didn’t own a home and we took our standard deduction, we would have paid a bit more tax, and only gotten a federal refund of $370.55, along with a state refund that would amount to slightly less than my homeowner-entitled $750. Let’s say I only ended up with $900 total in refunds….even so, it would have stayed in my pocket. No property tax, no maintenance, no nothing. I could put it in savings, take a cruise, or buy a new flat-panel TV. Now which sounds better to you…paying $850 out of pocket, or going on a Caribbean cruise that’s already paid for?
But, you might say, only idiots get their property tax bill at once. Most normal people fold it into their mortgage payment. (Why in HOLY HELL did no one tell us we’d be sorry if we didn’t do this?) If we’d done that, we’d have paid the tax gradually and gotten to keep our refund. True, but my monthly payment would go up $225/month. Now, we don’t make so much money that that wouldn’t take a major chunk out of our budget. There are things we wouldn’t be able to do if that money had to come out of pocket…routine home maintenance would be put off, doctor bills and vet bills would probably be credit carded, car repairs would probably be credit carded, and we would in no way be traveling or shopping or putting small bits of money back into the economy. When we got that $1.850 refund, it would be eaten up by repairs and paying down high-interest credit card debt.
What can I learn from all this?
As a homeowner, I will never get to keep my refund. Never. I will always have to sign over whatever I get AND THEN SOME to Pulaski County. And what’s even worse is that a few years down the road, when my payments go toward principal and not just interest, I will have less and less and then nothing to write off.
The people who think there are tax benefits every single year of a 30-year mortgage are wrong. They are not paying a full year’s worth of interest every year of that loan term, so they will only get the maximum benefit of owning a home for the first few years, then the benefits will slow to a trickle and then dry up entirely as there is no longer any interest to write off at all. And guess what? Does property tax ever go away? Nope. Does routine maintenance? Nope. Are you guaranteed a raise every year to help offset these costs? Nope-just be grateful you have a job.
So where are my great tax benefits? What am I really saving? Why did everyone lie to me and tell me this was going to work out in my favor, when every time I turn around I just have to pay and pay and pay for the privilege of owning my home? Am I just supposed to be okay with handing over my refund in entirety every year and then some, just so I can say I’m a homeowner? I’d rather be a renter, keeping that refund and building my savings or traveling to Europe or using that money to self-publish either of the two novels I have lying around. Anything would be better than handing it right back over. He giveth and then he taketh away.