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Why Doubling The Standard Deduction Wont Help Most Homeowners
One of the most talked-about provisions in the tax reform framework that the Trump Administration and Republican congressional leadership released a few weeks ago is the doubling of the standard deduction. Of all the changes the framework would make, this one is presented as something that will help middle-income households. And that is true, but the households that it mainly helps are renter households. Home-owning households will likely see their taxes go up even if they were to take that increased standard deduction. There are two reasons for this.First, although the standard deduction would increase from $12,600 for a family to $24,000, the plan would do away with the personal exemption and the exemption for dependents.
Right now, those exemptions are $4,050 per person, So, for a family of four, the family would see their standard deduction rise from $12,600 to $24,000 but they would also no longer get to take their exemptions, which, under the current code, would total $16,200. So, they would gain almost $12,000 but lose more than $16,000. Households with larger families would lose even more.
Second, for homeowners who are used to itemizing their deductions, all of these deductions except for two—the deductions for charitable giving and mortgage interest—would go away. For many middle-income households (those earning between $50,000 and $200,000), the two remaining itemized deductions won’t be enough to make it advantageous for them to continue itemizing. That’s mainly because they would lose the deduction for state and local taxes, which, for many households, is the single largest itemized deduction they take, even larger than the deduction for mortgage interest. As a result, they would almost certainly stop itemizing and instead take the standard deduction. While that might give some of them a better tax picture than if they continued to itemize, it would nevertheless be less than what they receive in tax benefits under the current code.
Just as importantly, the change would wipe out the distinction between owning and renting in the tax code. That’s a distinction that’s been part of the tax code for more than 100 years and losing it would result in an across-the-board drop in home values by 10 percent or more, NAR estimates.
Of course, everyone’s tax picture is unique. How one person or one family comes out under the proposed changes will differ based on many factors–household income, household expenses, the number of dependents, the size of the mortgage, the state a household lives in, and so on. But in general, based on analyses NAR and other organizations have either done themselves or commissioned others to do, the result won’t be a net gain for most middle-income households but rather a net loss. That’s why NAR and many other organizations are opposing the changes the framework is proposing.
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