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The Skinny on Taxes

How new tax law affects first-time home buyers

The new law provides generally lower tax rates for all individual tax filers. While this does not mean that every American will pay lower taxes under these changes, many will. The total size of the tax cut from the rate reductions equals more than $1.2 trillion over ten years. I've cited a real-life (first-time home buyer) example below. 

 Meet Barbara Buyer

  • To illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage interest and state and local taxes might affect a first-time homebuyer, consider the example of Barbara Buyer. Barbara, an accountant making $58,000 per year, is single and currently rents an apartment. She also pays state income tax of $2,900 and makes charitable contributions of $2,088, but the total of these is lower than the standard deduction, so she claims the standard.
  • Barbara’s tax liability for 2018 under the prior law is as follows:
Salary income $58,000
Standard deduction ($ 6,500)
Personal exemption ($ 4,150)
Taxable income $47,350
Tax $ 7,491
  • Under the new law, Barbara would get a tax cut, computed as follows:
Salary income $58,000
Standard deduction ($12,000)
Personal exemption ($ - 0 -)
Taxable income $46,000
Tax $ 6,060

Personal Exemption vs. Standard Deduction

  • Even though Barbara would not get the benefit of the personal exemption under the new law, her higher standard deduction would more than make up for the loss. In addition, the lower tax rates of the new law would help deliver the total tax cut of $1,431 ($7,491 - $6,060) as compared with the prior law.
  • However, let’s take a look at what happens to Barbara if she were to purchase the condo that she likes costing $205,000. She takes out a 30-year fixed rate mortgage at 4% interest, putting down 3.5%. Assuming she buys early in 2018, her first-year mortgage interest would total $7,856 and she would pay real property taxes of $2,050.

Tax Liability

  • As a first-time homeowner, her tax liability under the prior law would be computed as follows:
Salary income   $58,000
Mortgage interest $ 7,856     
Real property tax (1%)    $ 2,050  
State income tax (5%) $ 2,900  
Donations (3.6%) $ 2,088  
Total deductions   ($14,894)
Personal exemption   ($ 4,150)
Taxable income   $38,956
Tax   $ 5,393
  • Note. Under the prior law, Barbara would lower her tax liability for 2018 by $2,098 ($7,491 - $5,393) by purchasing the condo. This is the financial effect of the prior law’s tax benefits of buying a home. This amount effectively lowers her monthly mortgage payment by $175 per month.
  • Now, let’s take a look at what her tax situation would be under the new law as a first-time homebuyer:
Salary income   $58,000
Mortgage interest $ 7,856      
Real property tax (1%)    $ 2,050  
State income tax (5%) $ 2,900  
Donations (3.6%) $ 2,088  
Total deductions   ($14,894)
Personal exemption   ($ - 0 -)
Taxable income   $43,106
Tax   $ 5,423

Buying vs. Renting

  • Even though Barbara would still be able to claim all of her itemized deductions under the new law, she would lose the benefit of her personal exemption. This would mean that her taxes would actually go up under the new law by $30 ($5,393 - $5,423).
  • Let's look at the tax differential between renting and owning a home. This difference, which was $2,098 under the prior law, has now shrunk to just $637 ($6,060 - $5,423), or $53 per month. In other words, under the prior law, Barbara was given a strong incentive to move into the ranks of those who own their home. The new law still offers her an incentive, however slight it may be.
Full Example

Local Spotlight

Jesse Carr: Dogwood Films

In my brother's words, "that's some real Terrance Malick stuff right there". Dogwood Films was created by my friend, Jesse Carr. He's the master of wedding videography, engagement videos (like Richie and I's on the left), short films, feature films, and plenty of other projects near and far. Check out his work here.

New Listing Spotlight

1003 Phillips Street is a 3 bedroom / 2 bath house located just a few blocks off of Jefferson, seconds to Germantown. Listing price is $405,000. Let me know if you'd like to take a look!

 

Should you sell? Should you buy? Information is free and empowering. Please call or email if I can assist you or someone you know.

Email me:
aholland@villagetn.com
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2206 21st Avenue South #200
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Aly Holland at Village Real Estate · 2206 21st Avenue South · #200 · Nashville, Tn 37212 · USA

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