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Tax Benefits for Home Buyers
by Kimberly Lankford

I am a married 30-year-old woman with one child. We are looking into purchasing a new home and paying in full up front. What will the lack of tax deduction do to our tax situation? Our annual income is in the $60,000 range.Use the How Much Can I Save in Taxes? calculator to estimate how much of a tax deduction you would receive if you took out a mortgage.

Click the "Tables" tab for details about how much mortgage interest you'd be paying each year. To figure out how much tax savings you'd get from deducting that interest, take your yearly interest paid and multiply it by your tax bracket. If you're in the 27% bracket and paid $7,000 in mortgage interest, for example, the tax deduction would save you $1,890 (0.27 x $7,000) in taxes for the year.

But you should only take the write-off if it, together with other deductions, exceeds your standard deduction ($7,850 for married filing jointly in 2002 and $4,700 for single filers). You can also deduct your real-estate taxes and any up-front points you paid when you bought the house. To learn more about what you can deduct when you itemize, see the IRS's Should I Itemize? publication.

No matter how much the mortgage can help you taxwise, there are still other issues to consider when deciding whether or not to buy the house in cash. Consider other ways you could use the money. Have you made the most of tax-advantaged retirement and college savings? Do you have an ample emergency fund? Also see how diversified your portfolio is. Will buying the house in cash tie up too much of your money in real estate rather than stocks and mutual funds? For more issues to consider, see Should You Pay Off Your Mortgage?