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Zhi Finance » Tax considerations in refinancing

Tax considerations in refinancing

For many homeowners, the overall goal of refinancing is usually to pay less interest overall and to reduce monthly payments. When a homeowner is able to obtain a lower interest rate, there is often an opportunity to refinance the mortgage to take advantage of the lower rate. However, lower interest rates do not automatically translate into savings. Homeowners must carefully consider the relationship between the amount they save over the course of their loan and the amount they spend to refinance their mortgage. When the closing costs associated with refinancing are greater than the savings, refinancing may not be necessary. Refinancing can also have financial implications related to tax options.

Less interest payment equals less tax deduction

In most places, homeowners can deduct the amount of taxes they pay on their mortgage when they file their tax return. For homeowners who own their home for the entire tax year, this is often a substantial deduction. Those who refinance their mortgages usually pay less in mortgage taxes each year. While this is great in the long run, it can have a negative impact on a homeowner’s tax return.

Consider the situation where a homeowner is located under a major tax bracket, which can be quite expensive for the homeowner. As all ready discussed, refinancing may result in homeowners paying less in taxes each year. This means that taxpayers will be able to take a smaller deduction this year that now falls above the tax bracket they previously fell below. When this happens, homeowners may find themselves paying significantly more in taxes.

Consult a tax preparation specialist

Determining the exact consequences of reducing your home mortgage interest payments on your tax return can be a rather tricky process. There are some difficult equations involved, and it is easy to make mistakes when trying to determine the consequences of underpaying mortgage taxes. For this reason, homeowners should consult a tax professional when determining whether refinancing is worthwhile, as a tax professional can provide information about the impact of underpaying interest.

When choosing a tax preparation specialist, homeowners should seek the advice of friends and family if they have not hired one to do their own tax return. This can be helpful because trusted friends and family members are only likely to recommend professionals they believe to be knowledgeable, trustworthy and caring. A tax preparation professional should possess all of these qualities, but should also be well-versed in the field of tax preparation. This will allow the tax preparation professional to make all the right decisions when considering the needs of the homeowner.

Online Calculator

For homeowners who do not know a tax preparation specialist, or for homeowners who cannot afford the consulting services of these individuals, there are online calculators that homeowners may find very useful. These calculators are readily available on the Internet and can be used to determine the tax implications of refinancing. These calculators ask users to enter specific criteria and then return results regarding the amount of taxes a homeowner would pay in a year if they refinanced. In addition, homeowners can run these equations multiple times to consider a number of different scenarios.