The deduction question
Something The Wife - who being a CPA is vastly more up-to-date on things of this nature than I - mentioned to me in a recent discussion about the Glenn Tax was that with the abolition of property taxes, you'd also face the abolition of the property tax deduction for your federal income tax. This is something which gets glossed over a fair bit in this conversation, but is very key.
She noted that even though it isn't something like a dollar-for-dollar tax deduction, the benefits you receive from deducting your property tax greatly eases your overall tax burden. Removing that deduction, in addition to raising sales taxes and taxing things you regularly use but aren't currently taxed (such as the $500 to $600 we'd pay a year in taxes on child care alone), amounts to at best, a tax shift, and for some, an increase in your overall tax burden.
She noted that even though it isn't something like a dollar-for-dollar tax deduction, the benefits you receive from deducting your property tax greatly eases your overall tax burden. Removing that deduction, in addition to raising sales taxes and taxing things you regularly use but aren't currently taxed (such as the $500 to $600 we'd pay a year in taxes on child care alone), amounts to at best, a tax shift, and for some, an increase in your overall tax burden.
posted by Jmac at 6:39 AM
8 Comments:
Yes, but aren't the wealthier more likely to itemize? I know that we don't take that deduction because we still end up with a better deal from the standard one. My impression has been that this is because we bought a pretty inexpensive house at a good interest rate, but maybe Julie can provide more info.
If you bought a house recently (ie in the past 12 yrs or so) and didn't put down a huge downpayment, you'd probably be better off itemizing (though, not knowing anything about your finances, that's a broad generalization), since the interest on a mortgage payment is front-loaded --look at your statement and see how much goes to principal and how much to interest (I tell you, lending money is the easiest way to make money!). If you itemize you can also deduct your property taxes, your taxes on your car, plus you can also deduct unreimbursed employee-related expenses. Also, if you buy a car and use the equity in your home to do so you can claim the interest on that (in a way you can't if you take out a regular car loan).
This is why, despite the carping about "welfare", the homeowners' deduction is the biggest welfare program in America.
What do you mean by huge? I mean, we put down 20 percent, and we've cut off a lot of that interest by making prepayments, as it's saving us more to do that. Our property taxes aren't high. Our car is a 1992 Toyota. I'm able to deduct expenses for my freelance work, which is where they all come anyway. Basically, yes, if you have a new house and a new car, it's probably a good deal to itemize, but it doesn't work out for us.
"This is why, despite the carping about "welfare", the homeowners' deduction is the biggest welfare program in America."
This is one of the bigger misconceptions out there. The ability to deduct mortgage interest is simply a way to equalize the tax treatment of rental and owner-occupied housing. If I buy a house and rent it out the interest that I pay on the mortgage is deductible as a business expense. If I live in the house and, in effect, pay an implicit rent to myself by forgoing the rent that I could have earned, I would be unfairly treated if I couldn't deduct my mortgage interest. The mortgage interest deduction eliminates a potential huge subsidy to landlords.
The biggest subsidy to homeownership is that I while I pay rent to myself I don't have to claim the "income".
Illini89
and for every person getting a tax break, there's somebody else picking up the tab.
"This is one of the bigger misconceptions out there. The ability to deduct mortgage interest is simply a way to equalize the tax treatment of rental and owner-occupied housing. If I buy a house and rent it out the interest that I pay on the mortgage is deductible as a business expense. If I live in the house and, in effect, pay an implicit rent to myself by forgoing the rent that I could have earned, I would be unfairly treated if I couldn't deduct my mortgage interest. The mortgage interest deduction eliminates a potential huge subsidy to landlords."
Possibly, but the more significant element is that it (giving tax breaks on mortgages) was an effort by the federal govt --going back at least to the 1949 Housing Act-- to encourage homeownership and suburbanization (sprawl!) as a way of keeping the economy rolling in the post-war era --they were worried that w/out war spending the depression of the 1930s would return. Encouraging homeownership meant that people filled their new homes w/ all sorts of consumer durables plus, if they lived in the 'burbs they needed a car etc, which fuelled all sorts of other industries, from oil, to steel, to glass, to rubber. It was also a political solution to mass social protest in the 1930 --make people owners and they are less likely to buch the system (there had been widespread strikes and social movements in the 30s which threatened the capitalist order in the US).
should read "less likely to buck the system"...
"an effort by the federal govt --going back at least to the 1949 Housing Act-- to encourage homeownership and suburbanization (sprawl!) as a way of keeping the economy rolling "
Great post. It's interesting to think about that in light of our current economic meltdown. The Fed's attempt to forgoe the inevitable by continuing to manipulate interest rates is like standing in a hole and continuing to dig . . .
David
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