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Recently I’ve been hearing a lot of the various tax proposals from President Trump and other Republicans. While most of the focus has centered around lower corporation taxes, under the Trump and Ryan plan, they would condense the tax code from the 7 tax rates to only 3 tax rates of 12%, 25% and 33%.
While they slightly differ on the exact taxable amount, for the purpose of this article, I will use the Trump rate, since this has been most widely discussed in the media.
|Single||Married Filing Jointly||Tax Rate|
|$0-$37,500||$0 – $75,000||12%|
|over $112,500||over $225,000||33%|
Another interesting proposal is that tax rates wouldn’t simply be condensed, but the standard deduction would also increase. In fact, Trump has proposed to double the standard deduction. The standard deduction would increase to $15,000 for single filers and $30,000 if married filing jointly.
The 4 largest itemized deductions include home mortgage interest, state and local taxes, charitable gifts, and real estate taxes. These deductions account for about 17.8% ($195.7 billion) of total tax expenditures.
Rather than claim the standard deduction, according to the Congressional Research Service, only 22% of tax filers, making between $20,000-$50,000 per year itemize their deductions. Of those making over $100,000 per year, 84% itemize their deductions. In 2011, overall, 32% of tax filers in any income bracket selected to itemize their deductions instead of claim the standard deduction.
Opponents of Deduction Proposals
So this is a no-brainer, right? Who doesn’t want a bigger deduction? Well I can tell you one group that has voiced their displeasure. Those that work in the real estate industry worry that an increased standard deduction would affect their business.
The mortgage interest deduction is the third-most expensive subsidy in the tax code, costing the federal government about $69 billion per year, according to the Tax Foundation. The only deductions that cost more are The Exclusion of Employer Contributions for Medical Insurance Premiums ($206 billion) and Lower Rate for Capital Gains ($85 billion).
Many people believe by increasing the standard deduction, the tax benefit for homeownership here in the U.S would be reduced. Currently the U.S. homeownership rate is 63.5%. Do you know what the homeownership in Canada is…69%? And they don’t have any homeownership incentives. Under current rules, taxpayers can itemize and deduct the interest paid on up to $1 million on a mortgage, and home equity debt of up to $100,000.
Who Will the Deductions Affect?
Ok so, some may think, who cares? I don’t come anywhere close to the standard deduction now. Or even better, I paid off my house, so what do I care? You may think this won’t affect you at all.
Let’s say for one second that Congress decides to totally eliminate the mortgage interest deduction. According to a the Federal Reserve, if the mortgage interest deduction was eliminated, it might push prices down around 7%.
If you think about it, it makes sense from an economic standpoint. By reducing the amount of your effective interest rate, you can afford more house, which pushes up the home prices. If you remove mortgage interest deduction, the effective tax rate would rise, thus causing home prices to fall.
Clearly, those who receive the short end of the stick could be home builders and realtors since housing prices may drop. In addition, this could also hinder people who are depending on selling their homes in the near future to finance their retirement.
Who Will Win?
So who will be the winners? Those with cash to buy homes might be able to take advantage of the economic situation to buy. In addition, those that rent may be able to take larger standard deductions since they may not have qualified to itemize on their schedule A.
So readers, tell me, do you plan to itemize your deductions? Will this affect the way that you purchase houses in the future? Share your thoughts below.