Homeowner tax benefits work in tandem, reform plan would change that

UPDATE: House GOP leaders announced late Tuesday that they are pushing the release of the bill to Thursday, November 2.

The tax reform plan currently being debated in Congress appears to be a mixed bag for homeowners. On the one hand, it promises lower rates and a higher standard deduction for taxpayers who don’t itemize. On the other hand, it eliminates the personal exemption and the deduction for state and local property taxes. So, for a homeowning family of four, the tax consequences of reform could vary greatly depending on the final tax rates – which will be made public on November 1.

The National Association of REALTORS® has urged Congress not to pass a plan that devalues homeowner tax incentives. The reform plan does not alter the mortgage interest deduction (MID), used by 35 million tax payers each year. However, the plan does propose elimination of the deduction for state and local property taxes. More people use this state and local tax deduction (commonly referred to as SALT) than use the mortgage interest deduction. But it is important to keep in mind that homeowners who itemize always use these deductions in tandem. Taking one of the deductions away dramatically lessens the tax advantage of homeownership.

The chart below shows the actual tax savings that home owners in Washington receive when they itemize their tax deductions. The SALT deduction averages about 40% of the MID. The advantage of the MID is greatest to those who are in the early years of their home mortgage, since the interest payments are higher. Over time, as interest payments lessen, the property tax deduction becomes relatively more valuable, especially in higher tax states. It’s clear that homeownership tax benefits will change dramatically if both deductions do not remain in place.

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Editor’s note: On October 30, the Chairman of the House Ways and Means Committee announced that a deduction for property taxes would be included in the tax reform plan to be considered by the House.