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Article Highlights:
Renting versus Owning – Comparisons of the day-to-day costs of renting versus owning can be complicated. Although home-mortgage interest and property taxes are deductible, only the amount that exceeds the standard deduction will provide any tax benefit. Taxpayers in higher tax brackets experience greater benefits from such deductions, of course. The following worksheet can be used to estimate monthly after-tax housing expenses; prospective homeowners can then compare this value to their current rent payments.
This worksheet does not consider maintenance expenses, utility costs (which are usually higher for homeowners than for renters), and certain other costs of homeownership.
How to Use the Worksheet – After finding a prospective home, determine the annual mortgage interest, the estimated annual property tax (which is based on the sale price), the estimated cost of home insurance, and – if the property is governed by a homeowners’ association – the annual amount of that association’s dues. Use these amounts in the worksheet to determine the monthly after-tax housing expenses, which are comparable to a rent payment.
The worksheet can also be used to determine the tax savings if a loan is being refinanced. Complete the worksheet once with the data for the current loan and a second time with the refinancing information, and then compare the results to see what the tax savings will be. Keep in mind that if the current balance of a home loan is refinanced at a lower interest rate, the amount of interest that will be paid and the deductible will also go down.
WORKSHEET – MONTHLY AFTER-TAX HOUSING EXPENSES
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1 | Total Itemized Deductions (including home interest and taxes) | |
2 | Annual Home Loan Interest | |
3 | Annual Home Loan Principal Payments | |
4 | Annual Home Property Taxes (after accounting for the $10K tax-deduction limit discussed earlier) | |
5 | Annual Home Insurance Premiums | |
6 | Annual Homeowners’ Association Dues (if any) | |
7 | Tax-Deductible Amounts (total of lines 2 and 4) | |
8 | Annual House Expenses (total of lines 2, 3, 4, 5, and 6) | |
9 | Standard Deduction (from the table below) | |
10 | Line 1 Minus Line 9 (but not less than zero) | |
11 | Tax Benefit (the lesser of line 7 or line 10) | |
12 | Tax Bracket (from the table below, in decimal form, so 22% = .22) | |
13 | Annual Tax Savings (line 11 times line 12) | |
14 | Annual House Expenses, Net of Tax Savings (line 8 minus line 13) | |
15 | Monthly After-Tax House Expenses (line 14 divided by line 12) |
2021 FEDERAL TAX BRACKETS
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Taxable Income (Line 15 on Form 1040), in Dollars
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Tax Bracket | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
10% | 0 - 9,950 | 0 - 14,200 | 0 - 19,900 | 0 - 9,950 |
12% | 9,951 - 40,525 | 14,201 - 54,200 | 19,901 - 81,050 | 9,951 - 40,525 |
22% | 40,526 - 86,375 | 54,201 - 86,350 | 81,051 - 172,750 | 40,526 - 86,375 |
24% | 86,376 - 164,925 | 86,351 - 164,900 | 172,751 - 329,850 | 86,376 - 164,925 |
32% | 164,926 - 209,425 | 164,901 - 209,400 | 329,851 - 418,850 | 164,926 - 209,425 |
35% | 209,426 - 523,600 | 209,401 - 523,600 | 418,851 - 628,300 | 209,426 - 314,150 |
37% | Above 523,600 | Above 523,600 | Above 628,300 | Above 314,150 |
2021 STANDARD DEDUCTIONS
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Filing Status | Standard Deduction |
Single | $12,550 |
Head of Household | $18,800 |
Married Filing Jointly | $25,100 |
Married Filing Separately | $12,550 |
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