The U.S. income tax system has provided a deduction for property taxes, as well as other state and local taxes, since its inception in 1913, and for good reason: Like federal income taxes, state and local taxes fund essential government services. By allowing individuals to deduct these payments, our tax system ensures that the same income isn’t taxed twice. Put another way, the deduction prevents a tax on a tax, or “double taxation.”
This only makes good sense, and it’s a policy that’s replicated throughout the tax code. For example, current law follows this same principle in relation to the payment of taxes to other nations.
Unfortunately, recent tax reform proposals would repeal the deduction for state and local taxes paid. This change, coupled with the loss of personal exemptions, a near doubling of the standard deduction, and the elimination of nearly all other deductions could deliver a tax hike on millions of current homeowners.
That’s a problem, and the loss of the state and local tax deduction is a big part of the equation.
For homeowners, real property taxes represent an unending obligation as long as they own their home. Property taxes often increase over the years, as assessments on property increase and as local governments raise rates. Not surprisingly, the deduction for real estate property taxes is often the most claimed by homeowners.
In fact, significantly more taxpayers claim the real property tax deduction than the mortgage interest deduction; in 2015, 44.1 million wrote off real property taxes while 32.7 million deducted mortgage interest. As with the mortgage interest deduction, critics sometimes claim that the deduction for property taxes is misguided because it gives the lion’s share of its benefit to the wealthy, but that simply isn’t the case. Seventy percent of the value of real property tax deductions in 2014 went to taxpayers with incomes of less than $200,000, and 53 percent of those claiming the itemized deduction for real estate taxes that year earned less than $100,000.
Bottom line: the state and local tax deduction protects taxpayers from overpaying or paying twice on their taxes, while still affording benefits to those who don’t itemize deductions at all. That’s something worth defending, and realtors are committed to its protection.