The Tax Man Cometh
By Elizabeth Dougherty
It is almost that time.
As the clock ticks nearer April 15th,
everyone seems to panic about income taxes.
For you procrastinators, this is very good
year. April 15th falls on a Sunday and April
16th is the District of Columbia’s Emancipation
Day holiday. As a result, your tax returns
are not due, this year, until April 17th. If you
are one of those people that normally rush
to the Post Office, tax return in hand, near
midnight of April 15th, you can now wait two
extra days for your midnight trek.
Your Lee County House and Taxes
Property taxes in Alabama are relatively
low. Alabama is not a high-tax state in
comparison to the rest of the U.S. and ranks
49th in a measure of “property tax burdens”
by the states. Alabama has average of .31%
of the home’s value as a property tax.
Depending upon where you live in Lee
County, you could have the pain, pleasure
or privilege (depending upon your point of
view) of paying federal, state and city income
taxes. But in comparison, Alabama ranks as
the state that pays the least in payment of
combined state, local and federal taxes, per
capita at 27.5%. Connecticut is the highest
at 36%.
Alabama’s income tax rate for individuals
is a graduated rate of 2%, 4% or
5%, depending upon your income and
circumstances.(For more information go
to the Alabama Department of Revenue
at http://www.ador.state.al.us/incometax).
So what does this have to doing with
buying a house?
Plenty.
Owning a home is one of the last great
tax advantages that has yet to be ravaged by
our federal or state legislatures.
Mortgage Interest is Tax deductible
The main tax advantage in owning
your own home is the ability to deduct the
mortgage interest from your taxable income.
This can be a huge benefit for you.
As a renter, you cannot deduct rent
payments. If you rent a house for $1,500 per
month, then at the end of the year you have
spent $18,000 on rent. NONE of it is deductible
from your income taxes.
On the other hand, if you bought a
house and have mortgage payments of
$1,500 per month, you will still have spent
$18,000 during the year, but the interest
portion of your payment is tax deductible. On
your first year of the mortgage, about 95%
of your payment will go toward interest, or
about $17,000 will be tax deductible for
you. If you are in the 30% tax bracket and
apply this toward your income, the amount of
money you would get back at the end of the
year would be approximately $5,100 more
than had you not bought the house.
Currently the Internal Revenue Service
allows you to deduct interest on mortgages
that total up to $1,000,000 (or $500,000 if
you are married and filing separately).
You can deduct interest on first mortgages,
second mortgages, a line of credit or a
home equity loan as long as your main home
or second home secures them.
Remember, you are dealing with the IRS
so there are a multitude of details you need
to know. For the finer points you might want
ask your accountant or read IRS Publication
936 – “Home Mortgage Interest Deductions” at http://www.irs.gov/.
Other advantages
-Property tax is deductible from your
federal income tax burden.
-As your house appreciates you are
gaining equity that is not taxed.
-If you sell your house for a profit, you
may exclude $250,000 of your capital gain
from tax or $500,000 for married couples.
Unmarried couples who jointly own the property
may exclude $250,000 each. You must
have lived in the property, as a residence, for
two of the past five years.
Buy a home. Even without any tax
advantages, real estate has been one of the
best investments in the U.S. With the tremendous
tax advantages available, a house is
truly a shelter from the elements….and the
tax man.
Elizabeth Dougherty, a resident of
Auburn, is a former Real Estate Broker
and Mortage Broker. She can be
reached at EADougherty1@aol.com.
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