Many people assume that as soon as they buy a house their taxes will decrease dramatically. This is not necessarily the case. What are the components that will reduce your taxes, ie. what can you itemize?

1. Mortgage interest on a loan of up to $1m and a home equity loan of up to $100k

2. Property taxes

3. State taxes

Neither condo fees, homeowner's insurance, nor repairs or maintenance are deductible. Of course there are other deductions, but we'll just concentrate on the big ones here.

"I pay a huge amount in mortgage interest, property taxes and state taxes. So why do I still not get as high a tax deduction as I thought I would?"

Reason 1: Because you would have gotten a standard deduction anyway - as a married couple this is $10,000. Therefore your first $10,000 of deductions don't make a dent in your taxes at all.

Reason 2: The dreaded AMT. Under the AMT neither property taxes nor state taxes are tax deductible. For people who have high income and high deductions (and therefore are prone to fall into AMT) this means that only their mortgage interest will actually reap any reduction in tax for them.

It is therefore optimistic to assume that if you are in the 25% Federal tax bracket and the 9.3% California tax bracket you'll get 34.3% of tax back for every dollar you spend on mortgage interest and property taxes. Much more complicated calculations are necessary.

Before purchasing a home, it is also important to establish whether your withholding taxes are accurate. In many cases, where both spouses work and have high salaries, current withholdings are often not sufficient to cover their tax liability, because jointly their income moves them into a higher tax bracket than their withholdings assume.

Therefore withholdings taxes should be reviewed before you purchase a home in order to make correct assumptions as to the tax savings a home purchase will really provide you with.

So what should you do? Before buying a home, please contact me to go over your taxes with me and have me provide you with a realistic estimate of what you can afford and how it will change your taxes and your after-tax income.

Buying a home is probably the largest purchases you'll ever make - shouldn't you get some advice before taking a leap?