Last year's tax cuts--- the ones we all love even though the money in our pockets was borrowed from our children--- had an unintended side effect. The increase in the standard deduction for a joint return from $7,950 to $9,500 for 2003 and $9,700 for 2004 reduced the income tax burden on many couples. But it also reduced the benefit of homeownership deductions.
While one part of the tax code was reducing your tax bill, another part reduced the value of a beloved homeowner tax benefit. Funny how that happens.
You can understand this--- and see how much it affected you personally--- by following me through an example using the Home Ownership Tax Benefit Calculator on my website, www.scottburns.com.
Suppose you bought a $180,000 house with a 20 percent down payment and a 30-year mortgage at 6 percent. Your interest expense in the first year would be $8,592 and your taxes (assuming 2 percent of market value) would be $3,600. That's a total of $12,191 in first year deductions. When the standard deduction on a joint return was $7,950, your tax benefit would have been $1,060 in the first year. It would decline year by year over 14 years as the standard deduction rose with inflation. Your total tax benefit, assuming a 25 percent tax rate, was $8,279 or 4.6 percent of the initial price.
Now do the same calculation today with a $9,700 standard deduction for 2004. Your first year tax benefit drops to $623. So your tax benefit from home ownership fell $437. It then declines, year by year, for 8 years. Your total tax benefit, assuming the same 25 percent tax rate, is $2,758. That's only 1.58 percent of the initial price.
In fact, the situation is probably worse--- you can buy a $180,000 house these days and still be in the 15 percent tax bracket. So let's do the calculations again.
Suppose you bought the same house with about 10 percent down and an income a bit over $60,000. You'd have a slightly larger mortgage that would increase your first year deductions to $13,266. Your lower tax bracket, however, would reduce your first year benefit to $797. Your tax benefits would last for 15 years and total $7,053, or 3.92 percent of the initial value of the house.
After the higher standard deduction, however, your first year benefit would drop to $535. Your benefits would last only 10 years. They would total only $3,029, or 1.68 percent of the initial value of the house.
Does this mean you shouldn't own a house?
It means all gift horses, particularly those from politicians bearing tax cuts, should have their mouths examined. It means we have a complicated and hateful tax code that can turn the best intentions into unexpected losses. In this case, the expansion of the standard deduction for a joint return virtually eliminated the so-called "marriage tax" for most working couples.
But it also reduced the tax benefits of home ownership for the same couples.
It means that most people, particularly those who buy houses without wine cellars or 24 seat media rooms, need to start correcting their Realtors about the tax benefits of home ownership. It means that many homeowners will find that the tax benefits of home ownership aren't all they're cracked up to be.
At the end of September, 2003 the national median price for existing homes was $177,000. As I've pointed out in other columns, home mortgage and real estate tax deductions were once the mothers milk of home ownership. Today, they allow people who live in $100,000 houses to subsidize people who live in $400,000 condos.
Someday, in the far distant future, there may be a Democrat with vision. When there is, he'll call for a flat tax.
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