How is interest on a mortgage tax deductible?

We are in California and are about to buy our first home. The home we are buying is $260,000 and our loan is for $240,000. The interest rate is 6.125%. With an income of $100,000 and for deductions it’s the two of us plus 4 kids.
What kind of tax refund would we be looking at? I have a couple of friends who regularly get $20,000 tax refunds. Is that common? Does it seem that we would be able go exempt throughout the year on our paychecks?
Thanks!

By | 2013-08-27T19:19:08+00:00 August 27th, 2013|Mortgages Home Loans Interest Rate|1 Comment

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  1. Judy August 27, 2013 at 7:52 PM - Reply

    Interest is an itemized deduction. You can take either a standard deduction ($10,700 for a joint return in 2007) or the total of your itemized deductions, whichever is more. Your tax benefit from itemizing is the amount your itemized deductions are higher than the standard, times your tax bracket. Your interest for the first full year you own the home will be around $14,700. If your TOTAL itemized deductions is $23,000 and you are in a 15% tax bracket, your tax savings from itemizing would be $3430. Assuming that you aren’t itemizing now, which you probably aren’t if you don’t yet own a house, whatever refund you’re getting now would increase by about that $3430.

    If these friends of yours are telling you they are getting $20K refunds, they are either bs’ing you or are having WAY too much taken out of their paychecks. A refund is just giving back to you whatever you had withheld that overpaid your tax. (There are a couple other amounts called refundable credits that might be add a few thousand dollars onto what was overpaid, but they are for low-income people, not for people with anywhere near $100K incomes.) If you want an extra $20K refund, have an extra $385 taken out of your paychecks each week – that extra, times 52 weeks, will come real close to $20,000. Anyone who gets a $20K refund is doing exactly that.

    If your total tax for the year now is around $3000, then you could probably go exempt – if it’s around twice that which it probably is, don’t even think about it!

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