Buying house may not save us as much

I had previously posted about how I was thinking that the end of this year might be thebest time to buy a house to help keep us in a lower tax bracket.  Today, I was running some more numbers and realized it may not save us as much as I had originally though.  Part of the reason is that I realized I was wrong about how taxes are calculated.

First, I was reading through some comments on a blog post about mortgages the other night (don't remember where, didn't bookmark/flag it) and they were talking about how people often think they are saving more by buying a house than they really are.  They think "ohh, I'll pay $15,000 in mortgage interest, and get to save it all on taxes".  But there is a difference between deducting and saving.  Sure, you can deduct the $15,000, but you may only be saving $5,000 over doing standardized deductions.  So this had me thinking about how I figured buying a house would keep us in a lower tax bracket.  Maybe the margins were too small and it wouldn't...

So I sat down, figured out estimated income for next year, minus 401(k) contributions, personal exemptions, and then standardized deductions vs. itemized deductions for buying a house.  If we didn't buy a house, we would go into the 25% tax bracket, but only by about $1,500 (not nearly as much as I thought we would).  And if we bought a house, it would keep us within the 15% tax bracket, possibly by about $7,000-9,000 (depending on the cost of the home).  For the deductions, I figured only mortgage insterst (~6.5%) + property taxes (1.25%).  Point being, the margins are somewhat small.  If we get a better interest rate, could get closer to the higher tax bracket.  If we have some nice bonuses, could go higher.  Buying a house isn't a guarantee to keep us from the tax bracket.

But then after I had all the taxable income calculations done, I was curious how much are we talking here, dollar-wise.  I decided to actually look up how taxes are calculated and noticed that I had been completely wrong.  In my previous post, I said we'd end up getting $700 less per month if we were bumped up, but that was because I was thinking taxes were simply income * tax rate.  Wrong, way wrong.  If the tax bracket changes at $60,000 from 15% to 25%, someone who makes $60,001 is not going to have less take home than someone at $60,000.  All it means is the income above that level will get taxes heavier.  So any income over $60,000 will be taxes 25%, not all income will be 25%.  So over $60,000, you will begin being taxed heavier.

Using the estimated tax brackets for 2007, the taxes for someone (married filing jointly) who has a taxable income of $70,000 will pay the following:

$15,650 * 10% = $1,565.00

($63,700 - $15,650) * 15% = $7,207.50

($70,000 - $63,700) * 25% = $1,575.00

Total taxes: $10,347.50

Realizing the error in my ways, I decided to calculate how much we'd be paying in taxes for buying a home and saying in the 15% bracket versus not buying and falling in the 25% bracket.  It ultimately adds up to a savings of only $1,500-1,800 in 2007.  I say only, because I don't think that is worth breaking our backs for.  We could easily spend that money on house repairs.  We could lose that if we got into a bad mortgage, or a bad house.  My point is, we aren't going to save a tremendous amount.  If we don't buy, it is not going to make us unable to pay off debt, or anything.

More than likely, we will still look at homes at the end of the year, but I am not going to feel nearly as intent on purchasing.  If we don't buy, it is not a major loss.  We would likely move and rent a house, could put off buying a house for 6-12 months, and use that time to continue to pay off our debt and save more for our down payment.  Additionally, it will help me feel less pressured to pay things off to buy a house with some of our upcoming expenses, in addition the threat of Christmas on the way.  And even more importantly, it is good to have concrete reasons for buying or not.  With the tax savings making less of impact, our justification for buying vs. reasons for simply moving are kind of shifting the balance.