Tax Benefits

Thomas is a single, childless guy who rents a house for $1200 a month. His adjusted gross annual income is $128,000. He has $3500 state income tax withheld from his paychecks during the year and qualifies for no itemized deductions. His federal income tax liability for the year:

Adjusted gross income: $128,000

Standard deduction: single $4400

Personal exemption $2800

Taxable income $120,80

Thomas 2008 federal income tax: $32,129. Ouch! That’s a lot of Wii games!

But if Thomas buys a house with a mortgage payment of $1200 per month, everything changes:

Adjusted gross income $128,000

Itemized deduction for state income taxes: $3500

Itemized deduction for real estate taxes: $1500

Itemized deduction for mortgage interest: $11,400

Personal exemption $2800

=taxable income: $108,800

= Thomas’s federal income tax: $28,409. He just saved almost $4000 by buying a house instead of paying rent.