Friday, April 28, 2017

Popular property tax deduction among those threatened by Trump's tax reform proposal

Property-Tax-house-tax-price-tag
The federal deduction for local property tax payments could be eliminated as part of the Trump Administration's tax reform proposal.

I'm trying not to get too exorcised about the Trump Administration's recently released tax cut plan. In a past career I worked on Capitol Hill and watched first-hand how tax proposals morphed from concept to actual law.

But I still get a little knot in my stomach when I think about losing my state and local tax write-offs when I fill out my federal Form 1040.

Wait, you say. You're in Texas. There's no state or local income tax in the Lone Star State.

You're right. But we make up for it in many parts of the state with big property tax bills. 

An analysis by the Lincoln Institute of Land Policy of 2013 real estate taxation found Texas' property tax rates were the fourth highest in the United States and about 58 percent above the median rate for all states. Another study, issued in 2015 by the Tax Foundation, placed Texas sixth nationwide in property tax rankings. Comparisons of state real estate tax rates by CoreLogic in 2016 and WalletHub.com this March ranked Texas fourth and sixth, respectively.

Trust me, despite Texans' annoying affection for all things oversized, this is one area where many of us are not thrilled.

The only good thing about the bill is that they are tax deductible. But maybe not for much longer as local property tax deductions, in Texas and across the country, appear to be on the federal tax reform chopping block.

Eliminating deductions to pay for tax cuts: The Trump Administration's tax rewrite proposes to pay for its tax cuts in part by ending many of the tax breaks currently in the code.

"We are going to eliminate on the personal side all tax deductions other than mortgage interest and charitable deductions," said Treasury Secretary Steve Mnuchin when the plan was revealed on April 26.

Wait, wait, wait, yelled a lot of homeowners at their TV screens. OK, maybe not a lot were watching the press conference earlier this week, but you get the idea.

I need not only my mortgage interest deduction, but also my property tax bill claim, note these homeowners. After all, the amount of mortgage interest I pay goes down a bit every year of my loan, but my property taxes seem to increase every year.

OK, maybe this is the conversation in my head, but some lawmakers already are making similar arguments.

Democratic states vs. GOP lawmakers: Since the proposal was released, most of the attention has focused on the states that collect a lot in state and local income taxes.

Whether by political design (I know, too much conspiratorial credit for policy wonks) or just coincidence, those primarily are states that tend to be Democratic, at least in national elections. The Wall Street Journal notes:

The top nine states for the deduction, measured as a percentage of income, all voted for Hillary Clinton, and they have 18 senators, all Democrats. In the House, those same states have 33 Republicans, a number that exceeds the party's overall governing margin. That means they have the numbers to protect the break — if they all agree on the policy and use their leverage.

National policy vs. local voters: However, as the late U.S. House Speaker Thomas P. "Tip" O'Neill so astutely observed, all politics is local.

And some Democratic and Republican lawmakers who represent residents who will be hard hit by the tax deduction changes are already digging in to fight for their preservation.

Rep. Peter King (R-New York), whose district includes part of Long Island, is one of those lawmakers. He told the Wall Street Journal that he agrees with the general idea of eliminating tax breaks and cutting rates, but he's not happy with a tax law change that would prevent his constituents from deducting their $12,000 annual property-tax bills from their federal income.

I'm hoping my Representative, also a Republican, shares King's point of view. (Yes, I'm writing as an individual taxpayer now, not as a tax blogger evaluating policy pros and cons.)

This year's issuance of property appraisals in Austin and some suburban/exurban Travis and Williamson communities has me and many of my neighbors freaking out. Home values in Travis and Williamson counties, upon which the property tax amount is calculated, are up by 8 percent

Of course, further underscoring O'Neill's adage, not all Texans are joining the wailing ranks of California, New York and New Jersey homeowners who stand to lose real estate itemized tax deductions. Texas's lack of an income tax and large segments of lower-taxed rural properties mean that the federal deductions make up only 2.5 percent of the state's overall income.

That's helps explain why House Ways and Means Chairman Rep. Kevin Brady, a Republican whose district includes a large swath of suburban and rural territory north of Houston, argues that repealing the break will lead to equal treatment of residents of high-tax states and low-tax states.

New era, old tax reform template: The Trump tax reform approach is following the path taken three decades ago when the last major tax code overhaul, the historic Tax Reform Act of 1986, was created and enacted. Tax loopholes were closed and rates were cut.

It's not a bad idea in overall policy terms. Everyone wants to get rid of what they see as unfair loopholes. But things get sticky when you start looking at specifics. What's unfair to some taxpayers is seen as necessary for others.

Welcome to D.C., Mr. Trump. Your self-proclaimed negotiation powers are going to be sorely tested as the tax reform debate progresses.

Tax wiggle room: There is some straw grasping hope from the Trump Administration's one-page of tax bullet points, which National Economic Council Director Gary Cohn, who joined Mnuchin to make the tax announcement, adhered to more closely.

The Trump plan would eliminate targeted tax breaks that mainly benefit the wealthy, Cohn said, but "homeownership, charitable giving and retirement giving will be protected." (Data show that that the home mortgage interest and charitable donation deductions are used disproportionately by the wealthy, but that's for another discussion.)

Homeownership deductions as I read it includes property tax payments. I, my neighbors and lots of Representatives and Senators no doubt will argue that point as the tax reform/tax cut debate intensifies in the coming months.

Those of us who cringe every year when our tax appraiser and subsequent county tax assessor/collector notices arrive are clinging to hope that our county real estate taxes will remain federally tax deductible.

Appealing your property appraisal: Regardless of what ultimately happens to our property tax deduction, home owners nationwide will continue to have to deal with these assessments and taxes.

In many cases, that means contesting a real estate appraisal when it's surprisingly large.

Property appraiser point of view

If your county appraisal review board agrees that your local officials overestimated what your home is worth, you'll get a lower figure. And that will mean a lower tax bill based on that value.

These 7 property tax appraisal steps will help you through the process.

Good luck on your appraisal appeal. And if you rely on the property tax deduction, add an 8th step: Contact your House and Senate members to let them know how you feel about possibly losing this tax break.

You also might find these items of interest:

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