Make a list of the ten things Americans hold most dear. There is a good chance mortgage interest and real estate tax deductions are on it.
No sooner had my first column using the On Line Home Ownership Tax Benefits Calculator appeared than readers began sending messages in defense of their deductions.
So let me make something clear.
The Online Calculator wasn’t created as an attack on home ownership. I simply wanted to create a tool for measuring and testing how much we benefit from home ownership related deductions. Personally, I’ve treasured my deductions since I bought my first house long ago.
Even so, I’ve begun to wonder if the deductions are more about geography and less about home ownership. One way to understand is to leave our personal tax returns and check the big picture. We can do that with a recently published Internal Revenue Service examination of our filings for 2000.
Some 129.4 million households filed tax returns in 2000— but only 42.5 million felt the need to itemize deductions. So only one taxpayer in three itemizes. This is interesting because 68 percent of all households own their own home.
Why is this interesting?
If 68 percent of households own their homes but only 33 percent of households itemize, more than half of all homeowner/households don’t bother to itemize their deductions.
There are a lot of reasons for this. A surprising number of people own their homes free and clear. Some are elderly. Some are wealthy. Many bought their home long enough ago that their deductions no longer exceed the standard deduction. As recently as 1993, for instance, the median home price in the United States was $106,800. The deductions against a home of that price are now too small to itemize unless combined with other deductions.
Measured against our total income, home ownership deductions don’t amount to much. In 2000 we collectively had an adjusted gross income (our income after subtracting things like IRA and 401k contributions) of nearly $6.4 trillion. Our deductions for home mortgage interest and real estate taxes were a piddling 6.2 percent of that, even though they accounted for about half of all itemized deductions.
Of course, 6.2 percent of $6.4 trillion is still a lot of money. It represents significant tax savings to those who claim itemized deductions.
Many readers wrote that their home ownership deductions were a foundation that allowed other deductions to create tax savings. If, for instance, your mortgage interest and real estate taxes exceed the standard deduction ($7,950 joint return, $4,750 single, $7,000 head of household), then you’ll get the full benefit of additional tax deductions for charitable contributions, state and local income taxes, etc.
Exactly so.
But either you get a benefit from your ownership deductions or you get a benefit from your other deductions. You don’t get a benefit from both because the value of all itemized deductions is diluted by the ever-rising standard deduction.
While only 32 percent of those with incomes of $30,000 to $40,000 feel a need to itemize, over 90 percent of those with incomes over $200,000 itemize.
And that leads me to a basic question.
If “tax expenditures” are instruments of public policy— such as the encouragement of home ownership— is the $90 billion that mortgage interest and property tax deductions cost the Treasury money well spent? Is it really encouraging home ownership?
One clue to the answer is the fastest growing urban areas in America.
Of the 10 fastest growing cities, Las Vegas has the most expensive houses. The median home price was $166,100 at the end of 2002. Buy a home with a 3 percent down payment and a 4.5 percent 5/1 adjustable rate mortgage and your first year tax benefit for home ownership is a whopping $290 (assuming a 27 percent tax rate). The benefit will last 4 years and total $657, or 0.4 percent of the initial home value.
Visit some of the other growth areas— like Yuma or Phoenix in Arizona; Laredo, McAllen, or Austin in Texas; Provo in Utah; Naples in Florida; or Boise City in Idaho— and you’ll figure out pretty fast that area growth and home ownership are distinctly unrelated to federal home ownership tax benefits. In addition, five of the ten fastest growing areas are in states that have no income tax— Florida, Nevada, and Texas— so the “foundation” deduction argument can’t hold much weight.
Where does that leave us?
I don’t know. That $90 billion in tax savings from home ownership deductions, however, is nearly 10 percent of federal income tax collections.
Maybe we should just cut income taxes by 10 percent.
URLs to data sources:
Fastest Growing Areas in the United States:
http://www.infoplease.com/ipa/A0884487.html
State Income Tax Rates:
http://www.taxadmin.org/fta/rate/ind_inc.html
Internal Revenue Service Data on Individual Returns for 2000:
http://www.irs.gov/pub/irs-soi/00indtr.pdf
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Photo by Nubia Navarro on pexels.com
(c) Scott Burns, 2022