Tax reform's $10K property tax deduction is worthless
Monday, December 04, 2017
Many homeowners breathed a sigh of relief when the Senate's version of tax reform followed the House's H.R. 1, the Tax Cuts and Jobs Act, and included a tax deduction for property taxes.
But it might be time to start hyperventilating again.
While both chambers would keep the itemized deduction for the local real estate taxes that every homeowner faces each year, they will reduce its tax value. Each bill caps the deduction amount at $10,000.
Most homeowners' taxes covered: For many homeowners, that limit is cool. Their property tax bills are high, but not into five digits, so it means they can keep claiming them on Schedule A.
Others, however, do get bills from their tax assessor/collector offices each year that are more than that.
Still, at least they'll still get some break on this major cost of homeownership, right?
Well, in both cases, maybe. But in many instances, probably not.
Only a few itemized expenses remain: The problem is that the property tax deduction, along with the mortgage loan interest write-off (limited more by the House plan than the Senate's version) and charitable donations are the only three things that both bills (right now) agree will stay on Schedule A.
The option to claim medical expenses as an itemized deduction might make it into the final tax bill to be hammered out by a House-Senate conference committee.
That itemized deduction is in the Senate bill. It even says that for 2017 (yes, the return we'll file sometime next year) and 2018 tax years, the threshold will drop from the current 10 percent of adjusted gross income to 7.5 percent of AGI, making it easier for many to claim.
But the medical write-off is not guaranteed to become law.
And even if it does, filers will have to make the same deduction decision under any new law that they make now. Specifically, they will claim the deduction amount, either standard or itemized, that is larger.
Deduction decisions, now and in the future: With both bills calling for substantial increases to the current standard deduction figures, which differ based on your filing status, many folks will find that itemizing won't be worthwhile.
The House bill would up the standard deduction to $12,200 for single filers, $18,300 for heads of household and $24,400 for joint filers.
The Senate's amounts are $12,000 for single filers, $18,000 for heads of household and $24,000 for married couples filing jointly.
$10,000 won't matter: More than two-thirds of taxpayers already claim the standard deduction under current tax laws. Larger standard deduction amounts are likely to increase that number.
Why? Because even with an allowable 10-grand itemized property tax claim, more taxpayers likely will find that their tax-reform-hiked standard deduction is more than the total on their Schedule A.
That math is because itemizers under the proposed tax code changes will have fewer options.
Under tax reform, they will need substantial mortgage interest or charitable contributions — or medical expenses if that provision is included in any new tax law final conference version — to get an itemized amount that's more than the increased standard deductions.
One hypothetical return: Let's look at theoretical home-owning couple's return under tax return.
Jim and Jane Taxpayer's residence is at 234 Expensive Home Road in Hometown, New Jersey. I selected the Garden State for this example since it has some of the highest property taxes in the country. New Jersey is among six states (the others are California, New York, Illinois, Texas and Pennsylvania) that, according to a Tax Foundation analysis of IRS data, where residents claim more than half of the value of all state and local tax (SALT) deductions.
Jim and Jane's local N.J. property tax bill is $12,000. They paid $5,000 in interest on their high-dollar home's loan. They gave $3,000 to charity. And they and their kids are healthy, so they didn't have enough medical expenses to clear 7.5 percent of their AGI.
That gives this example-only N.J. couple $20,000 in itemized deductions. That's less than either the proposed House $24,400 or Senate $24,000 standard deduction amounts for jointly filing married couples.
So Jim and Jane will take their $24,400 or $24,000 or whatever amount the tax reform conferees come up with and merrily go along filing their taxes without itemizing.
Of course, Jim and Jane's single neighbor Joan, who has the same itemized amounts in connection with her residence, would go with Schedule A since the $20,000 is more than the $12,200 (House) or $12,000 (Senate) standard deduction amount proposed for unmarried taxpayers.
No sympathy for the tax devils: Having more taxpayers use the standard deduction generally is a good thing. It's easier not only for filers (and their tax pros), but also for the IRS, which won't have to hassle with added forms to double check.
But some homeowners, especially in states with expensive real estate markets, are not going to be happy that they can't recoup all their property taxes at federal filing time.
I know that if you live in a less expensive area or are a renter, it's hard to muster much sympathy for owners of mini-mansions who've been getting help from Uncle Sam for their housing.
And I know that regardless of your tax situation, it's darn near impossible to muster any sympathy for the IRS.
But some folks, and not just Jim and Jane's peers, are not thrilled with the proposed tax reform changes.
Housing, real estate industries upset: The shift away from itemizing decreases the value of such deductions. And it's why the housing industry and charitable organizations oppose both the House and Senate tax plans.
These sectors are worried about the ramifications when millions of taxpayers across the United States follow Jim and Jane's example and opt for the larger standard deduction under the proposed tax code changes.
Without the associated itemized tax breaks, argue housing and philanthropic representatives, people will stop buying homes and limit their charitable giving.
Maybe that will happen. Or maybe not.
The United States is one of the few major industrialized nations that subsidizes homeownership through the tax code and yet folks buy homes all over the world.
What America's home-related tax benefits do, say the residential tax break opponents, is encourage people to borrow more than they could afford to buy a house that's bigger than they need. This, they argue, is what led to the bursting of the housing bubble and the start of the 2008 recession.
I generally agree with that, but I'm compelled to add that greedy lenders knowingly securitizing unwise loans was as big, if not bigger, contributor to the economic downturn. But back to tax reform.
And both tax bills still offer homeowners a change to cash in on their residences when they sale.
The House and Senate proposals retain the law that lets sellers keep tax-free up to $250,000 in profit if they're single or $500,000 if married and jointly filing. The only change here is that owners would have to live in the house a big longer, for five out of the eight years before the sale, before getting this tax break.
Nonprofits not happy either: As for charities, folks who claim the standard deduction still give. And they're doing so because they want to, not for a tax break.
But it is true that of the about 30 percent of filers who itemize, these usually higher-income individuals represent about 80 percent of giving. Some of those folks might not donate if they're not getting any tax benefit for it.
I'd prefer that the Internal Revenue Code offers some sort of tax credit to all taxpayers, regardless of which deduction method they use, for donating to qualified charities. This could keep folks who'll lose this itemized deduction giving, as well as finally give a tax break to those standard deduction filers who've never received any tax benefit for their generosity.
My preference is not likely to show up in the tax reform conference discussions. But it's something to think about after this round of tax code finagling is done.
And yes, there will be future tax law changes.
Members of Congress, their donors and the lobbyists they hire will fiddle around with our tax laws long after whatever version of the Tax Cuts and Jobs Act is signed into law.
You also might find these items of interest:
- 8 differences to be reconciled in House & Senate tax bills
- GOP tax plans would rub SALT in some Red State tax wounds
- 10 tax moves to make by Dec. 31 — and before Congress changes the tax laws
Posted by: john | Wednesday, July 04, 2018 at 09:01 AM