Tax Considerations When Re-Financing
Like many people, you may want to take advantage of lower interest rates. But there may be other reasons to refinance. You may want to consolidate existing mortgages, reduce interest-rate risk, add flexibility or simply build equity faster.
For several householders the overall goals of re-financing are much paying less in interest overall and reducing every month payments. When a householder is able to get a lower rate of interest, there’s normally the chance to re-finance the mortgage to capitalize on the lower rate of interest. However, a lower rate of interest doesn’t automatically translate to a savings. The householder must carefully consider the amount of money they’ll be savings over the course of the loan in relation to the amount of money they’ll be spending to re-finance the mortgage. When the closing prices associated with re-financing are larger than the savings, re-financing may not be warranted. Re-financing may also have financial ramifications associated with tax options.
Paying Less Interest Equals Less of a Deduction
In most locations, householders are permitted to deduct the amount of taxes they pay on their mortgage when filing their tax forms. This is normally quite a substantial deduction for householders who owned the house for the entire tax year. Those who re-finance their mortgage will typically be paying less money each year in taxes on the mortgage. While this is great in the long run, it may adversely affect the householders tax return.
Consider a situation where a householder is located just below a major tax bracket which would be rather pricey for the householder. As all ready discussed, re-financing may result in the householder paying less money in taxes each year. This means the taxpayer will be able to make a smaller deduction this year now fall above the tax bracket they previously fell below. When this happens the householder may get themselves paying significantly more in taxes.
Consult a Tax Preparation Specialist
Determining the exact ramifications of paying less interest on a house mortgage on a tax return may be a rather tricky process. There are a number of difficult equations involved which may make the apt to make mistakes while trying to determine the consequences of paying less in taxes on the mortgage. For this reason, the householder should consult a tax preparation specialist when determining whether or not re-financing is worthwhile because the tax specialist may provide information regarding the impact of paying less in interest.
In choosing a tax preparation specialist, the householder should seek out opinions from friends and family members if the householder doesn’t employ a specialist to prepare their own taxes. This may be helpful as trusted friends and family members are only likely to recommend professionals they feel were knowledgeable, trustworthy and caring. A tax preparation specialists should have all of these qualities but should also be well versed in the area of tax preparation. This will enable the tax preparation specialist to make all of the right decisions when considering the needs of the householder.
For householders who don’t know a tax preparation specialist or for householders who are unable to afford the consulting services of these individuals, there are online calculators which homeowners might find very useful. These calculators are readily available throughout the Internet and can be used to determine the tax ramifications to re-financing. These calculators ask the user to input specific criteria then returns results regarding the amount the homeowner will pay in taxes during the year if he refinances. Additionally the homeowner can run these equations several times to consider a number of different scenarios.