Are Additional Tax Breaks Better Than a Sunrise Over Lake Michigan?

Is your income less than $72,384? Is your household income less than $105,560? If your answers are yes, you may be missing out on a little known program offered by the City of Chicago?s Department of Community Development.

I recently met with a client who has an income of $55,000 per year. The client is single and is looking to purchase for the first time in the City of Chicago. During our application I pointed out the City of Chicago?s TaxSmart Program, which is a Mortgage Credit Certificate (MCC) program. The program has been put into place to give tax savings to a first-time buyer (defined as someone who has not owned a home in the past 3 years) or to a buyer of a home in a targeted area. If purchasing in a targeted area, it doesn?t matter if you are a first time buyer or if you are a recent homeowner. The home buyer can apply for the MCC in conjunction with a TaxSmart mortgage loan from a participating lender.

TaxSmart Equals an Additional Tax Credit of 20%

The benefit of this program is an additional tax credit of 20% of the mortgage interest that can be taken annually. This credit can be taken annually as long as the home remains the primary residence of the buyer.

Example: Single Person & Does Not Own a Home*

For a single person making $55,000 a year, it is assumed they would pay taxes in the amount of 20% (effective tax rate/bracket). So this would be $11,000 in federal taxes paid. By owning a home, mortgage interest and real estate taxes are deductible on your income tax. For this example we are going to assume mortgage interest write off is $10,800 and real estate taxes are $3,000.

$55,000 (income) – $10,800 (mortgage interest) – $3,000 (real estate taxes) = $41,200 taxable income.
$41,200 is the taxable income at 20% (effective tax rate/bracket). So this would be $8,240 federal taxes paid.

If you did not own a home you would have paid $11,000 in federal taxes, now when you own a home your federal taxes are $8,240 which is a $2,760 tax advantage. For this client, she typically would get a tax refund of $800.00 per year when she was not a homeowner, now she will receive $800 plus the $2,760 for being a homeowner.

TaxSmart Means An Additional $1,719 Refund For This Example

In addition to this standard tax benefit of $2,760, my client will also get back $1,719 on her tax refund because her income falls under the limit for the TaxSmart program. The 20% additional tax break can be taken each year that the home buyer hold the mortgage loan and uses the home as their primary residence.

[TABLE=9]

Consult your mortgage professional for more details and specific information regarding this program.

*Consult your tax professional, certified public accountant or tax preparer