WHAT DEDUCTIONS WOULD YOU KEEP?

My fellow tax blogger Kelly Phillips Erb – FORBES.COM’s TaxGirl, has a regular feature called “Fix the Tax Code Friday”.  She poses a tax question that concerns a problem with the current mucking fess that is out Tax Code and calls for comments from her readers.

A recent question was -

“If we scrapped all of the deductions under the Tax Code except one, which one would you want to hold onto?”

My answer -

I would keep many of the current deductions, although none of the current credits (FYI – click here for my series of TWTP posts on how I would rewrite the Tax Code).  Specifically I support keeping the deduction for state and local income taxes, and real estate taxes and “acquisition debt” mortgage interest on a principal personal residence (owner-occupied housing).  But my reason is not to encourage home ownership. 

Here is how I explained my reasoning in a post at THE WANDERING TAX PRO back in 2013 -

The Internal Revenue Code taxes Americans based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location. A family living in the northeast or California that has an income of $100,000-200,000 (apparently considered “upper-income taxpayers”) may be just getting by, while a similar family that resides in “middle America” lives like royalty on the same level of income. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.

It costs an awful lot to live in, for example, New York, certainly New Jersey, Connecticut, Massachusetts, and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.

Real estate and state and local income taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, and California. Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically “equalize” the tax burden.

I do believe that the itemized deduction for real estate taxes and mortgage interest on secondary personal residences and the itemized deduction for “home equity” mortgage interest (not used for “substantial” home improvement) should be eliminated.

I have two questions for my readers (especially the tax professionals)  –

First – how would you answer Kelly’s “Fix the Tax Code Friday” question?

And second – what do you think about my suggestion, and the issue of “geographical equalization” in general?

TTFN