Chapter #10 Deductions and Losses: Certain Itemized Deductions
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The Big Picture
Impact of Itemized Deductions on Major Purchases
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John and Kiara Williamson, a young professional couple, have been renting an apartment in Atlanta, Georgia, since they were married. Their income has grown as they’ve become more established in their careers, and they now believe the time has come to purchase their own home. In addition, their desire to buy a home now may be coming at a good time, because John’s mother, Martha, needs to move in with them due to her declining health and their current apartment is too small to accommodate her. John and Kiara’s current monthly rent is $2,000, but they are willing to spend up to $2,600 per month on an after-tax basis for their first home.
After months of house hunting, they have found the perfect home, but they are concerned it may be too expensive. If they acquire a standard mortgage to finance the purchase of the home, the total cash outlay during the first year of ownership will be $43,000 ($2,000 principal payments, $37,000 interest payments, and $4,000 real estate taxes). Alternatively, if they use their retirement and taxable investments to secure the home financing, they can qualify for a lower interest rate and thereby reduce the interest charge from $37,000 to $35,000. They expect their Federal AGI to be about $200,000 and their taxable income to range between $170,000 and $185,000 for the year. John and Kiara have not itemized their deductions in prior years because the amount of their qualifying expenses has been just below the standard deduction amount. Assume that the Willliamsons face a 6 percent state income tax rate (after any Federal tax benefit).
Can John and Kiara Williamson afford to pursue their dream of home ownership?
Read the chapter and formulate your response.
