You just bought your first home, congratulations! With this new decision comes new responsibilities. More bills to pay during the year that you never paid when you were renting. You probably need more money in your pocket yet you see the same paycheck with those big tax withholding to the IRS and state. You can use that tax money now rather than when you file your taxes at the end of the year. You will need to adjust your tax withholding by requesting a W-4 from your employer and changing your allowances on box 5. The big question is what number will allow you to have more money in your pocket every pay period but without making you pay when you file your taxes. The famous accounting answer is: IT DEPENDS.
This is a very delicate number to get right. If the number is too low, then you are missing out on getting your tax money now. However, if the number is too big you will not just only have to pay when you file your taxes but you might also incur some interests and penalties. That’s the least surprise you want after buying that first home.
My recommendation is to hire a CPA or tax accountant to do an exact tax planning for your particular case. As everyone has different types of income, filing status and deductions. However, before you start looking for someone you must make sure it makes sense for you. The following calculation will help you understand whether you should hire a CPA for your tax planning or not.
Figure the following for the current tax year:
Mortgage Interests payments during the year (you can request this from the lender or loan originator)
Property Tax (it is usually 1% of the value of the property, make sure you prorate for the year) & state withholdings (See your last paystub taxes taken out for state withholdings, if you are married and filing jointly make sure to add your spouse ‘s paystub as well) *Property Taxes & State withholdings are capped at $10,000. So, if the addition of these two numbers is over 10,000 you will only be able to take 10,000
Charitable Contributions: Cash and Non –Cash Contribution, donations you are currently making or planning to make during the year.
Add them up. Write the number down. This is your quick and dirty ITEMIZED DEDUCTION
Now let’s compare it with the following numbers and filing status:
Head of Household: $18,350
If your Itemized deduction number is higher than the standard deduction number based on your filing status then congrats! You should change your tax withholdings. For the accuracy of that number please make sure to hire a CPA or tax accountant to change your paycheck tax withholding to be sure you are getting the most out of your paychecks. If the standard is higher than your itemized this unfortunately means that the house purchase has not helped for federal tax purposes. This has become more common with the new tax rule because the standard deduction doubled from previous years. This tax change left out a lot of people from qualifying from itemizing.
Ebony Cueva, CPA
4630 Campus Dr. #203
Newport Beach, CA 92660