How do banks look at income based on tax deductions?

[Anonymous]

Hi everyone, 

I'm a first-time buyer with a pretty basic question (I think). I make $140,000 annually pre-tax (at a W2 job). I work in an industry where you can deduct a lot of what you purchase as business-related. In the end, I typically end up deducting about 30-40k from my taxable income. So, will that mean that a bank will consider my income 100-110k? Or do they recognize my actual income and will be able to see that my tax return is just reflective of having more deductible expenses than others? Hopefully this makes sense. Thank you!

[kc0039]

Commission or regular salary? Or rather break it down for us.

Base Income:

Bonus:

Overtime:

Commission:

[Anonymous]

Regular salary

Base Income: $140,000

Bonus: $0

Overtime: $0

Commission: $0

But once I deduct certain expenses in my taxes, the amount of money I earned according to the IRS is lower by about 30-40k compared with my base salary. 

[VALoanMaster]

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@Anonymous wrote:

Hi everyone, 

I'm a first-time buyer with a pretty basic question (I think). I make $140,000 annually pre-tax (at a W2 job). I work in an industry where you can deduct a lot of what you purchase as business-related. In the end, I typically end up deducting about 30-40k from my taxable income. So, will that mean that a bank will consider my income 100-110k? Or do they recognize my actual income and will be able to see that my tax return is just reflective of having more deductible expenses than others? Hopefully this makes sense. Thank you!

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Hi Kaz1488,

We would have used your Adjusted Gross Income in years past BUT it looks like that will change because the Tax Cuts & Jobs Act eliminated unreimbursed employee business expenses.

[kc0039]

If you're going conventional, we should be able to use $140,000 since you're salary. 

[Anonymous]

Can you explain more about this? What makes you believe that AGI will be going away in the future? 

[Anonymous]

When you say "going conventional" you mean 20% down, correct? Or are there more qualifications? 

[VALoanMaster]

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@Anonymous wrote:

Can you explain more about this? What makes you believe that AGI will be going away in the future? 

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Because unreimbursed employe expenses deductions have gone away.

10. No more miscellaneous itemized deductions

Under prior law, you could write off so-called miscellaneous itemized deductions to the extent they exceeded 2% of your adjusted gross income (AGI). This rule potentially allowed you to deduct things like unreimbursed employee business expenses, investment expenses, tax-related expenses, and union dues. For 2018, the TCJA eliminated itemized write-offs for miscellaneous deductions that were subject to the 2%-of-AGI threshold under prior law.

[Anonymous]

So when applying for a mortgage, my W2 from 2018 will be interpreted based on my actual income, not my AGI? 

[VALoanMaster]

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@Anonymous wrote:

So when applying for a mortgage, my W2 from 2018 will be interpreted based on my actual income, not my AGI? 

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Well, since you're going to have just the standard deductions, your income will be whatever your w-2 number is.

As far as conventional loans go, no, you do not need 20% down to go conventional.