New Property Tax Deduction
Limited amount allowed to non-itemizers
By Kaye A. Thomas
Corrected August 4, 2008
Provision applies for 2008.
The housing law signed by President Bush on July 30 allows people to deduct up to $500 in real property tax ($1,000 on a joint return) even if they don't claim itemized deductions.
Itemizing and the standard deduction
The tax law gives you a choice between claiming itemized deductions, such as medical expenses, mortgage interest, charitable contributions and state and local taxes, or claiming a single, simpler deduction called the standard deduction. Most people make this choice based on which will save the most money. Some people claim the standard deduction even when it means paying more tax because it eliminates the recordkeeping involved in itemizing.
New law increases standard deduction
Under the new law, if you decide not to itemize you can increase your standard deduction by the amount of real property tax you could have claimed if you did itemize, up to $500 ($1,000 on a joint return). As written, this rule applies only to your 2008 tax return, although Congress may decide to extend it to subsequent years.
Note that Congress took a different approach with this item than with other deductions added in recent years. The deduction for interest on student loans, for example, is allowed as an "adjustment to income." That's significant because it reduces the magical number called adjusted gross income that's used to determine limitations on many tax benefits, from Roth IRA contributions to the new homebuyer credit. This allowance for real property tax will not affect your adjusted gross income because it's allowed as part of the standard deduction.
I've previously pointed out that allowing these deductions for people who don't itemize is bad tax policy. The standard deduction was created to simplify the tax calculation while providing fairness because anyone who wants to itemize can choose to do so. In effect, this new law allows people to deduct their real estate taxes twice: once as part of the regular standard deduction, and again as part of this special increase in the standard deduction.
The provision can't be justified as a measure to help the housing market. The maximum tax benefit per person (in the 35% tax bracket) is just $175, and because most people in the 35% tax bracket claim itemized deductions, the typical benefit will be much smaller. The main impact of this provision will be to increase complexity, as taxpayers and professional tax preparers will have to track down real property tax payments even if the taxpayers choose not to itemize.
[An earlier version of this article failed to note that as written this provision allows the deduction only for 2008.]