Breakeven for standard deduction vs itemized deductions under new tax bill:
Question One: A married couple filing jointly is taking
out a mortgage on January 1, 2018. The standard
deduction for the married couple is $24,000.
The mortgage interest rate is 4.0 percent. The couple has nonmortgage interest
deductions totaling $7,000. The loan
to value ratio for the house purchase is 90 percent.
What is the value of the home
where this married couple is indifferent between taking the standard deduction
and taking itemized deductions in 2018?
Solution: The first step of the problem involves
finding the initial balance of a mortgage which results in $17,000 of interest
in 2018 when the mortgage is taken out on the first of the year. The initial balance of a mortgage is an input
of the CUMIPMT function. We need the
loan balance that with the other assumptions listed above gives us $17,000 in
interest.
This loan balance is found by
inputting different loan balance values until we find the one that gives us
$17,000 in first year interest.
The table below indicates the
breakeven mortgage is somewhere between $400,000 and $500,000 and is a bit
closer to $500,000.
Finding Range for Initial Loan Balance


Interest rate

0.04

0.04

nper

360

360

Loan Balance

$400,000

$500,000

Start Period

1

1

End Period

12

12

Type

1

1

First year Interest

($14,490)

($18,113)

The table below indicates
that the initial loan balance that provides $17,000 in interest income is a bit
smaller than $470,000.
Getting Closer to Initial Loan Balance


Interest rate

0.04

0.04

nper

360

360

Loan Balance

$460,000

$470,000

Start Period

1

1

End Period

12

12

Type

1

1

First year Interest

($16,664)

($17,026)

The second step is to
calculate the house value. The mortgage
is 90 percent of the house value so the house value is around $470,000/0.9 or $522,222.
Concluding Thoughts: The analysis presented here
indicates that under the S tax bills considered by Congress and under the
mortgage assumptions listed here a married couple filing jointly with around
$7,000 in nonmortgage deductions and a $522,000 house would be indifferent
between taking the standard deduction and itemizing.
To put this in perspective, the current median
U.S. home sales price is around $247,000.
The tax bill currently under
consideration by Congress eliminates tax advantages of buying a home for most
firsttime home buyers. The key to this
result is the doubling of the standard deduction.
A previous policy post showed
that the higher standard deduction has a larger impact on home purchases than the
abolishment of deductions for state and local income and student loan interest.
Authors Note: Other financial problems solved with Excel
can be found at the following page.
I am moving many of my finance
and policy blogs to Word Press. Go here
for free and helpful spreadsheets on mortgage qualification issues.
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