The Oxymoronic Standard Deduction for Real Estate Taxes

September 1, 2009

The IRS has released a draft copy of a new form: Schedule L, the Standard Deduction for Certain Filers. The form is for an additional standard deduction for state and local real estate taxes, new motor vehicle taxes, or a net disaster loss. Until now the standard deduction has been one of the simplest portions of the tax code for taxpayers to understand and benefit from.

The federal government believes that income used to pay certain expenses should not be taxed. To achieve this, taxpayers are allowed to deduct those expenses from income before tax is calculated, thereby lowering the resulting tax bill. You can deduct things like certain medical and dental expenses, state and local income or sales taxes paid, real estate taxes paid, mortgage interest paid, gifts to charity, certain job expenses, and a few other categories. Together these are known as itemized deductions.

But the federal government has also put a minimum on the amount that you can deduct. This minimum is known as the standard deduction, and in 2009 equals $5700 for single filers and $11,400 for married couples. It represents the minimum amount that the federal government believes should be tax-free for every taxpayer, regardless of the actual itemized deduction amount. You can always deduct the higher of the standard or itemized deductions in order to maximize the tax savings. So if someone is claiming the standard deduction it is because it gives them a greater benefit than itemizing their deductions.

As mentioned above, real estate taxes are deductible under itemized deductions. In a sense, the itemized deductions are implicitly contained within the standard deduction, plus an extra amount to bring total deductions up to the standard deduction level. But now there is an additional “standard” deduction for real estate taxes paid for those who do not itemize (which comes with its own 21 line form). This deduction is not really “standard” since it only applies to certain taxpayers. It looks a lot more like an itemized deduction, making its name a bit of an oxymoron. This goes against the fundamental principle behind the standard deduction, turning it into a standard-plus-itemized deduction, rather than allowing taxpayers to claim the greater of the two. In a sense, the standard deduction for real estate taxes is a double deduction, since the standard deduction already implicitly contains a real estate tax deduction.

This, arguably, is unfair to itemizers, who only get to deduct their real estate taxes once. Of course, maybe lawmakers believe that the standard deduction is too low and too much income is being taxed already. But if that is the case then the standard deduction should be increased across the board, not just for taxpayers who pay real estate taxes. Do we not care about renters, a population that includes many low income people who might be most in need of the extra deduction?

The standard deduction for real estate taxes is yet another example of our government’s obsession with promoting the American Dream of home ownership through the tax code.

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