To illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage interest and state and local taxes might affect a first-time homebuyer, consider the example of Barbara Buyer. Barbara, an accountant making $91,580 per year, is single and currently rents an apartment. She also pays state income tax of $5,086 and makes charitable contributions of$2,088, but the total of these is lower than the standard deduction, so she claims the standard deduction.
Barbara’s tax liability for 2018 under the prior law is as follows:
| Income | $91,580 |
| Standard Deduction | -$6,500 |
| Personal Exemption | -$4,150 |
| Taxable Income | $79,862 |
| Tax | $15,619 |
Under the new law, Barbara would get a tax cut, computed as follows:
| Income | $91,580 |
| Standard Deduction | -$12,000 |
| Personal Exemption | $ 0 |
| Taxable Income | $77,492 |
| Tax | $12,988 |
Tax Difference Under New Law.
Even though Barbara would not get the benefit of the personal exemption under the new law, her higher standard deduction would more than make up for the loss. In addition, the lower tax rates of the new law would help deliver the total tax cut of $2,632 ($15,619 – $12,988) as compared with the prior law.
However, let’s take a look at what happens to Barbara if she were to purchase a condo costing $440,000 (median price for a condo in California). She takes out a 30-year fixed rate mortgage at 4.5% interest, putting down 20%. Assuming she buys early in 2018, her first-year mortgage interest would total $15,372 and she would pay real property taxes of $5,500.
As a first-time homeowner, her tax liability under the prior law would be computed as follows:
| Income | 91,580 |
| Mortgage Interest | $15,372 |
| Property tax | $5,500 |
| State Income Tax | $3,738 |
| Charitable Contributions | $2,088 |
| Total Itemized Deductions | -$26,699 |
| Personal Exemption | -$4,150 |
| Taxable Income | $60,731 |
| Tax | $10,837 |
Note: Under the prior law, Barbara would lower her tax liability for 2018 by $4,783 ($15,619 – $10,837) by purchasing the condo. This is the financial effect of the prior law’s tax benefits of buying a home. This amount effectively lowers her monthly mortgage payment by $399 per month
Now, let’s take a look at what her tax situation would be under the new law as a first-time homebuyer:
| Income | $91,850 |
| Mortgage Interest | $15,372 |
| Property Tax | $5,500 |
| State Income tax | $3,738 |
| Charitable Contributions | $2,088 |
| Total Itemized Deductions | -$26,699 |
| Personal Exemption | $0 |
| Taxable Income | $64,881 |
| Tax | $10,213 |
Tax Difference Under New Law. Even though Barbara would still be able to claim all of her itemized deductions under the new law, she would lose the benefit of her personal exemption. However, her taxes would actually go down under the new law by $623 ($10,837 – $10,213) as the lower tax rate would more than make up for the loss.
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FIrst-Time-Buyer-Example