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Home Owners Would See Hefty Tax Hikes Under Reform
Typical home-owning families in three different parts of the country would all turn into losers with higher federal income tax liability under the 15% housing credit that the President’s Advisory Panel on Federal Tax Reform last week recommended as a replacement for the current deduction on mortgage interest.
An analysis by NAHB found that the proposed "simplified" income tax plan would actually represent tax hikes of 39.6% for a home-owning family of four in the Chicago metropolitan area, 19.4% for a similar family in San Jose, Calif. and 8.0% in Binghamton, N.Y.
Here are the run-downs of the tax consequences of the reform measure for the three households:
- The Chicago family has a $100,000 annual income and is paying off a $300,000 30-year mortgage at 6% on a home valued at about $390,000 and a 7% $50,000 line of credit over 15 years. The $21,338 they are paying in mortgage interest for the two loans reduces their taxes by $3,201. Under the reform proposal, they would receive 15% of the mortgage interest they pay on the $300,000 of their mortgage debt. The value of the housing credit would be $2,685, which represents a decline in the current value of their mortgage interest deduction of $516, or about 16%.
Under the reform plan, the family would not be able to deduct $6,192 in property taxes, which reduces their current tax liability by $929, or $3,000 in state and local income taxes providing a tax savings of $450. In exchange for these and other system changes in the tax, they receive a $6,300 family credit.
The bottom line: they would pay $7,247 in federal income taxes under the simplification proposal compared to $5,190 under the current system, an increase of $2,057.
- With an annual income of $120,000, the San Jose family has a 6%, 30-year mortgage for $400,000 on a home valued at about $500,000 and is carrying a $50,000 home equity line of credit which it is repaying at 7% over 15 years. Its $27,304 deduction for mortgage interest on those loans reduces its taxes by $6,826. Their 15% housing credit would yield only $3,580 in tax savings. Their tax savings from mortgage interest would decline by $3,246.
The family loses its current property tax deduction of $2,830, which cuts its taxes by $707, and its $4,872 deduction for state and local income tax, which is worth an additional $1,218. In exchange, they receive a $6,300 family credit.
The bottom line: their tax liability is $9,510 today and would rise to $11,352 under the proposed reforms.
- A family in Binghamton, N.Y. earns $85,000 and is repaying a 6%, 30-year $200,000 mortgage on a home valued at about $250,000 and a 7%, 15-year equity line of credit of $25,000. Its annual $13,652 mortgage interest deduction is worth $2,048 in tax savings under the current law. Under the reform proposal it would receive a $1,790 housing credit for a loss of $258 in tax savings.
The tax payers would forego tax savings of $855 by losing the deduction of $5,702 in property taxes and lose an additional $466 in savings by not being able to deduct $4,305 in state and local taxes. In exchange, they would receive a family credit of $6,300 under the new system.
Under the reform proposal, they see their federal income tax liability rise from $4,305 to $4,649, an increase of $344.
To see the line-by-line analysis used in these three examples, NAHB members can click here.
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