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I am trying to purchase a house in the next few months. The 2018 Standard Deduction for married couples filing jointly will be $24k. I think that to reach this limit with itemized deductions, I would have to buy a house for at least $400k, right?

My budget for this new house would be around $250-300k and my tax filing status will be married filing jointly. Let's say that the mortgage rate is 4.6% APR. Will the Standard Deduction for 2018 or the coming years always be greater than itemized deduction? Can one of you please elaborate on this?

  • If you buy late in the year you could waste some costs that could been itemized but are lost because there wasn't enough time for others to accumulate. – mhoran_psprep Sep 1 '18 at 17:53
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The answer very much depends on the circumstances. But let's make some assumptions and simplifications, and arrive at a ball-park figure.

The major contributors to itemized deductions for many homeowner taxpayers are:

  1. State and local taxes (income, property, disability insurance, etc.)
  2. Mortgage interest

State and local taxes deduction is capped at $10,000 under the new tax law. This leaves $14,000 for mortgage interest, in order for itemized deductions to exceed the standard deduction of $24,000 for married filing jointly status.

Let's assume 30 year mortgage term, and fixed 4.6% annual interest rate. By building the amortization schedule, it can be seen that a $307,000 loan has $14,020 of interest paid in the first year. Thus, that is the minimum loan size for which itemizing deductions would reduce tax liability.

Finally, assuming 20% down-payment, the total minimum price of the house comes out as $383,750. That appears to be the direct answer to the question.

One thing to note is that mortgage interest reduces every year. Therefore, house price would have to be higher than that for it to make sense to itemize deductions for few years following the purchase.

Lastly, and needless to say, one typically buys a house that he/she likes and can afford, and then files taxes in the way that minimizes tax liability, not the other way around. Thus all of the above is only a rough guidance on the possible relation between the house price and the tax filing implications.

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The laws can't be summarized down to "If house worth more than X, itemize" with a single number for X.

Under the new rules (capped deductions for mortgage interest and state and local taxes) home ownership alone will not make it worthwhile for a married couple to itemize. That's one of the selling points of the new law -- taking the standard deduction results in simpler tax forms. The people who still find it worthwhile to itemize either have large charitable contributions, or multiple types of deductions.

The $24k standard deduction is only for married filing jointly. If you have another filing status, you might benefit from itemizing... but we can't answer that question without knowing your filing status, mortgage interest rate, property tax rate, and any other itemizable deductions you plan to take. And then, it will be related to the mortgage amount, not the value of the house.

I suggest you stop asking how much house you have to get to maximize your deduction, and instead pick a house you can afford. Then optimize your taxes relative to that house.

  • Thanks. I edited my question with more details if you could provide an answer. – SomeDude Sep 1 '18 at 18:26

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