Does Buying a Home Lower Your Tax Bracket?


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If you are looking to buy a home to save money on your tax bill each year, there are several ways you can own a home.

See: 2022 Tax Brackets: How Much Will You Pay Based on the Latest IRS Inflation Adjustments?
Find out: Why the holidays are a good time to buy a home

The first is to itemize your tax deductions to reduce the amount of tax you owe.

It makes sense to do this when itemized deductions are greater than standard deduction, that is, the dollar amount of itemized deductions in excess of standard deduction. This is the only part that can actually save you money. If you then multiply that excess by your marginal tax rate, you can see how much the deductions save you.

Plus, the amount of money you can save on taxes by owning a home largely depends on your filing status and income. A single declaring person or head of family and a married couple, for example, do not benefit from the same savings from their tax deductions. The 2020 homeowner deduction table below shows why:

Single or married deposit separately Married Head of household
Standard deduction $ 12,400 $ 24,800 $ 18,650
Itemized deductions $ 30,000 $ 30,000 $ 30,000
Amount of the deduction that benefits from the breakdown $ 17,600 $ 5,200 $ 11,350
Additional tax savings through ventilation, 12% federal tax bracket $ 2,112 $ 624 $ 1,362
Additional tax savings through ventilation, 24% federal tax bracket $ 4,224 $ 1,248 $ 2,724
Additional tax savings through ventilation, 35% federal tax bracket $ 6,160 $ 1,820 $ 3,973

Source: Forbes

So while owning a home doesn’t necessarily cost you a full tax bracket, you can certainly save a lot by making sure you itemize it properly.

In fact, mortgage interest is one of the most common deductions itemized, regardless of a person’s tax bracket.

The other option is for the first time you take out a mortgage. At this point, you have the option of paying part of your interest in advance in order to reduce your monthly payment. The amount of interest you pay up front is called “mortgage points” and the figure is calculated as a percentage point of your loan. Mortgage interest is tax deductible, so if your points meet certain criteria, this prepaid interest payment may also be deductible.

In order to meet these criteria, your mortgage must be secured by your home, the points must not have cost more than is typical in your area, the points must have been paid in cash at closing via your down payment and no. Other closing costs, such as appraisal or title fees, were not in place.

See: How do mortgage points work?
Find: What should you update first in your home: kitchen or bathroom?

If either option is open to you, it may be worth buying a home for tax purposes.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private banking and investment research. Georgina has written for Investopedia and WallStreetMojo.


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