Tuesday, April 27, 2003
Single, overtaxed? Buy a home
Financial planner Scott Burns says that investing in a home actually pays higher dividends in tax savings for a single person than for a married couple.
Marriage. Children. Homeownership. They seem to go together.
But according to Burns, the largest tax benefits for homeownership go to people who are single. The second-largest go to heads of households. The smallest go to married couples that file joint returns.
The upside-down result doesn't happen through magic or nastiness from the Internal Revenue Service. It's just another of those strange results that comes from our wretched tax code.
The real source of the difference is that married couples filing joint returns have a standard deduction of $7,950. A head of household has $7,000. A single taxpayer has $4,750.
Since single taxpayers' itemized deductions will benefit them when they exceed $4,750 (while the married couple won't benefit until their itemized deductions reach $7,950), homeownership deductions help single taxpayers cut their tax bills long before they help the married couple.
Here's how Burns says it works.
An income of $60,000 will qualify you, whatever your marital status, to buy a home that costs about $175,000. (This assumes an interest rate of 5.5 percent, a property-tax rate of about 2 percent, and a down payment of about 3 percent.) Whether you are married, single or a head of household, an income of $60,000 will put you in the 27 percent tax bracket.
On those figures, a married couple filing a joint return will have tax savings for 16 years. They will be worth a total of $12,800. This is 7.3 percent of the original purchase price of the house. A head of household, however, will enjoy 19 years of tax benefits worth $17,869. That's 10.2 percent of the original purchase price of the house.
But the real winner is a single taxpayer. Buying the same house, with the same down payment, the same mortgage payment and the same property-tax bill, the single taxpayer will enjoy 27 years of tax benefits worth $37,209.
That's 21.3 percent of the original purchase price of the house. The single taxpayer, in other words, has a government incentive to buy a house that is three times the incentive provided to a couple filing a joint return.
What happens to the tax savings if the same homebuyers elect to finance their homes with lower-interest-rate adjustable mortgages?
According to Burns, they decline, but the tax advantage for the single taxpayer increases. It's more than four times the tax savings for the married couple filing a joint return. While the married couple has tax savings of $6,617 over a 12-year period, the single taxpayer collects tax savings of $27,438 over a 26-year period.