Tax Benefits of Owning Versus Renting a Home
Homeowners have tax benefits of owning versus renting a home. We all know the saying, “you are only guaranteed two things in life, DEATH, and TAXES”. Well, it is now tax season for the calendar year of 2021.
In this blog we will detail the tax advantages mortgage borrowers receive, tips for filing your taxes for mortgage qualifications, and alternative mortgage programs we offer to self-employed borrowers. This will be mentioned numerous times in this blog, but Gustan Cho Associates are not certified tax professionals and can only offer tax advice. We legally cannot tell you how to file your income tax returns. As of 1/25/2022, Americans can now file their 2021 federal tax returns.
How Are Americans Taxed From the IRS?
As most of you know, there are numerous ways our government taxes us on a daily and annual basis. Federal income tax may be the most aggressive and feared tax mechanism we have today. An income tax is a tax imposed on individual wage earners. A percentage of their income or profits will be considered taxable income. Depending on how much money you make, your tax rate will adjust. Individuals who make more money, pay higher taxes. This is a torn or progressive tax system. It is estimated that the top 1% of wage earners pay about 40% of federal income taxes on an annual basis.
Tax Rates on Lower-Income American Wage Earners
Lower-income families will have a much lower tax burden and sometimes no tax burden at all. The income tax instrument can be traced all the way back to the Egyptians but in the United States, the first personal income tax was started on August 5, 1861. The income tax started off at 3% of all income over $800 which is now equivalent to approximately $1900. The income tax was used to pay for war efforts in the American Civil War. The income tax was then repealed and replaced by another income tax in 1862 and then again in 1894. Americans making over $4000 of the time were taxed 2% of that income.
Tax Rates for Americans
This meant only about 10% of households across the country paid income tax. This upset many Americans and even the United States Supreme Court ruled that income tax was unconstitutional and created the 10th amendment. Unfortunately, in 1913, the 16th amendment to our constitution made income tax a permanent fixture in the United States tax system, and we have been stuck with federal income tax ever since.
In the fiscal year of 1918, the internal revenue (IRS) collected over a billion dollars and raised over $5 billion by 1920. Our tax rates have fluctuated many times and will continue to fluctuate based on the party in power. Unfortunately, in times of war, the United States has seen federal income tax rates hit 92% for some individuals. How many of you wish we could reinstate the 10th amendment outlawed in federal income taxes? Wishful thinking!!
Tax Benefits of Owning Versus Renting a Home: Income Tax Refunds
Tax refunds – Enough of the doom and gloom surrounding income taxes, we are now stuck with them for the rest of our lives, unless something crazy happens. There are thousands of Americans who receive a tax refund at the end of each year. A tax refund is an overpayment of your federal tax liability refunded to you after you file your federal income taxes. Every working American (who is paid with a W2) is required to fill out a W-4 form when you are hired for employment. When you fill out this form, you will indicate the amount of taxes you need to be withheld from each paycheck.
Liabilities Versus Taxes
The more liabilities you claim, the fewer taxes are withheld from each paycheck. In order to receive a tax refund, you must file your federal tax return each year. Once the government receives this information, they will process what was sent. They will make sure the information provided matches the information sent to the IRS from your employer. You are able to electronically file your federal tax returns with the Internal Revenue Service and you should receive your tax refund within 12 weeks. The average turn time is currently around three weeks.
IRS Refund Money
With modern technology, the Internal Revenue Service can send you a refund via direct deposit or through a paper check in the mail. You may also be refunded through a savings bond. Many readers of Gustan Cho Associates choose to utilize their tax refund to help qualify for a mortgage. Since this refund is part of the income you have already received, there are no seasoning requirements to utilize your tax refund for mortgage qualifications.
Tax Benefits of Owning Versus Renting a Home: What If You Owe the IRS Money
What if you owe the IRS? This can get into troubled waters very quickly. If you did not pay the IRS enough during the fiscal year, you will owe the IRS and will not be receiving a refund. This can happen in many different ways. Typically, your income increases, and you move up a tax bracket. When this occurs, you may not have withheld enough from each paycheck to cover your income tax liability.
What Is Owed or Due to the IRS
After you file your federal income taxes, you will know exactly how much you owe the Internal Revenue Service. If you owe a substantial chunk of money, you will need to work out payment agreements with the IRS. The IRS will allow you to pay them in full, have a short-term payment plan, or enter into a long-term installment plan. If you enter one of these payment plans, it can impact your mortgage qualifications. Your lender must include your IRS payment in your total debt to income ratio. And for programs like FHA financing, you must be in your payment plan for a minimum of three months.
Tax Benefits of Owning Versus Renting a Home: Tax Credits
We are currently under the Tax Cuts and Jobs Act put in place in 2019. This tax code was put in place by then-President Donald Trump. This will be the final year under this tax code. Under this tax code, there have been a few changes and credits offered. One of the main credits is the child tax credit. This is a great saver for many families across the nation. Please check with your tax professional for specifics regarding the tax cuts offered.
Advantages and Tax Benefits of Owning Versus Renting a Home
What tax advantages are available for homeowners? Once again, Gustan Cho Associates would like to reiterate that we are not certified tax professionals, and any tax advice should be reviewed by your trusted tax professional. In order to take advantage of tax deductions, you will want to make sure your total deductions are greater than the current standard deductions offered by the new tax code. One incentive for mortgage borrowers is the tax credits they can receive. If you have a mortgage, each time you make a monthly payment, a portion of that payment goes towards your lender as mortgage interest.
Tax Benefits of Owning Versus Renting a Home: Mortgage Interest is Tax-Deductable
The amount of interest you pay on your mortgage is tax-deductible. The amount you may deduct will change depending on how you file. Specifically, if you file as a single individual, file jointly as a married couple, or file as a head of household. If you purchased discount points to lower your interest rate on the loan, you may also deduct the dollar amount from your federal income taxes.
Local and State Tax Benefits of Owning Versus Renting a Home
As a homeowner, you may also deduct your state and local property taxes. Private mortgage insurance or PMI may also be deducted from your itemized tax return. If you are a homeowner and paid more than $600 in mortgage interest, the mortgage servicer will send you a 1098 tax form in the mail at the end of each calendar year. This form should be sent to your tax preparer to make sure you capitalize on all possible deductions. Once again, this may sound like a foreign language, and we highly recommend you contact a certified tax professional for specific tax questions surrounding your qualified mortgage deductions.
Tax Benefits of Owning Versus Renting a Home on Bank Statement Loans
NON-QM bank statement mortgage programs.
Most of the information in this blog pertains to W-2 employees. But we do not want to leave our self-employed individuals out of this article. If you are self-employed, I’m sure tax season is very frustrating. If you are attempting to qualify for a mortgage as a self-employed individual, you may realize how aggressive the tax burden may be. After the real estate crash of 2008, there are very specific guidelines a lender must follow for self-employed individuals. We may only qualify you based on the income you submit to the IRS.
Can I Qualify for a Mortgage Being Self-Employed?
As a self-employed individual versus a W2 income wage earner, you more than likely take advantage of write-offs to minimize your tax liability. So, if a lender has told you you do not qualify for a mortgage based on your income, we strongly recommend you reach out to our team as we have numerous mortgage programs that use alternative income calculation methods to qualify for a home loan. The most popular of these programs is our bank statement mortgage program. Instead of utilizing a two-year average from your federal IRS tax returns, we have programs that will utilize your bank statements to verify qualifying income.
Click Here to Check if You are Qualified for a Mortgage.
Non-QM Lending Requirements
Here are a few general qualifications for our bank statement mortgage programs. You must be 100% owner of the business and have at least a two-year history of being a business. We can utilize a business or personal bank statement or a combination of personal and business to calculate qualifying income. There are a few different methods for calculating your qualifying income, typically an underwriter is going to use 50% of your business-related deposits over the course of a 12 or 24 month period. The other 50% of your business-related deposits are set aside for business-related expenses.
Non-QM Lenders
For more information on a NON-QM mortgage loan for self-employed borrowers, please reach out to our expert or loan officer at (800) 900-8569. You may also email alex@gustancho.com with your specific questions. Mike is our NON-QM loan expert and is available to answer any questions you may have. These programs have helped thousands of self-employed borrowers across the nation qualify for the home of their dreams. As a self-employed individual, tax write-offs are very common but can come back to bite you in the butt when looking for financing.
Tax Benefits of Owning Versus Renting a Home: Mortgage Company with no Lender Overlays
Tax season can be stressful especially if you owe the IRS. Gustan Cho Associates do not have lender overlays and are able to help individuals seeking a mortgage even if they owe the IRS for federal income taxes. Many banks and lending institutions have lender overlays when it comes to federal tax obligations. Even if you are on a payment plan with the IRS, many lenders cannot qualify you based on their company lender overlays.
This is where we can save the day. Gustan Cho Associates only utilize agency guidelines without any additional hurdles to jump over. Each agency has very specific tax qualifications. Since federal income taxes are reported on the CAIVRS system, a mortgage underwriter must verify you are not in debt to the federal government to qualify for a mortgage. Just like student loan debt, the federal income tax liability cannot be dismissed through bankruptcy. Meaning if you owe the IRS, you will pay them one way or another.
Tax Benefits of Owning Versus Renting a Home During Tax Season
Tax season is never a fun time. If you have a friend who is a certified tax associate, just ask them. While there are many misconceptions about who pays what in taxes, you must only worry about your federal tax obligation. We have all heard the saying, “tax the rich”, but no matter how you feel, you owe your portion of federal income taxes.
Gustan Cho Associates are experts in mortgage lending, not tax preparation. If you are in the market to qualify for a home loan and would like to use your tax refund to qualify, please reach out to our team today. You can reach us directly at (800) 900-8569. Our highly skilled team looks forward to assisting you purchase or refinance a home.
Disclaimer on this article on Tax Benefits of Owning Versus Renting a Home
Disclaimer – The information provided in this article are opinions and should not be taken as legal tax advice. If you need help finding a certified tax professional in your area, we can point you in the right direction.
