Faye's Blog

One way to save some of your hard earned income is to reduce your tax obligation. There are many legitimate ways to take advantage of tax reduction benefits currently available. I believe it is everyone’s responsibility to learn about these benefits and ultimately take advantage of them. After all, a dollar saved is a dollar earned.

Let’s explore this concept. Take a family who has a yearly income of $100,000 and is subject to a 25 percent tax rate. The yearly income tax paid by this family would be $25,000 per year, or $2,083 per month. This means that the breadwinner’s income is spent on taxes through March each year. By purchasing a house this family can keep a good portion of that for themselves.

Now lets take the same family investing 3.5 percent as down payment on a $400,000 home. The total monthly payments (calculated based on a 30-year fixed rate at 4.25 percent, APR 4.5 percent) including taxes and insurance will be $2,669 — $1,911 on principal and interest; $416 on taxes; $50 on insurance; and $292 on mortgage insurance.

The annual interest payments of $16,441, yearly tax payments of $3,504 and yearly mortgage insurance payments* of $4,992 are all deductible from their income. This means a grand total of $24,937 will be deducted from this family’s income prior to paying taxes. In another words, instead of paying taxes on $100,000, they will pay taxes on $75,063. This means $24,937 of their income was spared from being taxed at 25 percent and that amount equals to $6,234.

By making the right choice, this family is now keeping this amount for themselves. This money can be invested in a 401K plan; their kid’s college funds or they can simply pay off their monthly credit card debt. No matter how you look at it, this is a win-win situation.

* Mortgage insurance payments are deductible for families earning $100,000 or less through 2010, and for home purchased between January 2007 and December 2010.