IN DEFENSE OF THE ITEMIZED DEDUCTION FOR TAXES

Here is an argument for allowing an itemized deduction for the full amount of state and local income and property taxes that I have often made, but which I do not hear very much from other sources.

An individual is taxed on gross income – gross salary for a W-2 employee.  So, a person living in New Jersey, where I used to live, and a person living in North East Pennsylvania, where I now live, pays the same tax rate on $100,000 of gross wages. 

But what it you deduct basic living costs, like mortgage principal and interest payments and state and local income taxes and property taxes – assuming that both taxpayers live in the same size home.  If you take the tax paid, using the Standard Deduction instead of Schedule A, as a % of what is left after subtracting these expenses the person in North East Pennsylvania is paying much less federal income tax, as a % of what is left after paying these expenses, than the person living in New Jersey on the exact same gross income – because the NJ resident has a lot less left.

In NJ wages are somewhat artificially inflated to reflect the increased cost of living.  So it is obvious that a $100,000 salary in NJ is not the same as a $100,000 salary in NEPA.

Allowing a deduction in full for state and local income taxes, property taxes, and acquisition debt mortgage interest on a taxpayer’s primary personal residence helps to “geographically equalize” the tax burden so that all taxpayers are treated relatively equally, regardless of where in the US they live.

So, what do you think?

TTFN

JUST SAYING – INCREASING THE MARRIAGE TAX PENALTY

There has been much talk about the effects of the limited $10,000 - $5,000 if Married Filing Separately -  itemized deduction for property taxes and state and local income or sales taxes combined in the GOP Tax Act. 

However, something that has not been mentioned, at least in what I have read, is the fact that this limitation substantially increases the Marriage Tax Penalty.

Two working single individuals, either living together or separately, who itemize can each claim a deduction of up to $10,000 in combined property taxes and state and local income or sales taxes.  That is a total of $20,000 in itemized deductions on the 2 returns. 

For residents of New Jersey, where my clients are from, it is not hard for each individual to reach the $10,000 maximum, or come close to it, even if they both own and live in one home.

If these two individuals, who both work and have their own separate income, were married the itemized deduction would still be limited to $10,000.  Filing separately would not make any difference, as everything I have read specifically identifies the limitation as $5,000 for married taxpayers filing separate returns. 

So, by having joined together in holy wedlock this dual-income couple will probably be paying tax on $10,000 more in net taxable income, which would, again in New Jersey, result in over $2,000 in additional federal income tax.  This tax penalty could be increased if the state tax return follows the federal return.   

I wonder if this is what the idiots in Congress intended.  Of it they actually gave the matter any thought.

Just saying.

TTFN

THIS JUST IN – NJ HOMESTEAD BENEFIT FILING DEADLINE EXTENDED

Acting State Treasurer Robert A. Romano has announced that the deadline for filing 2013 Homestead Benefit applications has been extended from October 30 to December 31, 2015.

“To be eligible for a benefit for calendar year 2013, you must be a New Jersey resident who owned a principal residence on Oct. 1, 2013, and paid property taxes on that home. You must also have reported $75,000 or less in New Jersey gross income for 2013 or, if you were disabled or age 65 or older on Dec. 31, 2013, you must have reported gross income for 2013 of $150,000 or less.”

Most beneficiaries should receive a credit that will be applied against one of the quarterly tax billings in 2016.  Qualifying homeowners will only receive a check if their home was a unit in a co-op or a continuing care retirement community they no longer owned your home.  

The state had totally skipped issuing a Homestead Benefit one year – no Homestead Benefit applications were mailed out in 2014, and no credits against property tax installments were issued in 2014.  The credits that would normally have been issued in 2014, based on 2012 information, were applied to the May 2015 real estate tax billing.

Click here for information on the program.

TTFN

OOPS - THEY DID IT AGAIN!

The taxes imposed by the State of New Jersey are among the highest taxes in the country – sales tax, income tax, estate and inheritance tax, and especially property tax.  The only tax that does not rank in the top 5 is the state’s gas tax.  While not the major factor in my move to PA it was certainly a secondary one.

To provide some relief to NJ homeowners, especially seniors and the disabled, the state has two Property Tax Relief programs – the NJ Homestead Benefit and the Property Tax Reimbursement (aka Senior Freeze).

The Property Tax Reimbursement (PTR) program “reimburses eligible senior citizens and disabled persons for property tax or mobile home park site fee increases on their principal residence”.

A qualifying homeowner establishes a “base year” by having two consecutive years within a certain income threshold ($80,000, indexed for inflation beginning with tax year 2012).  Once the base year has been established each year that homeowner will receive a check from Trenton for the difference between the property taxes assed by their municipality and the base year tax amount.

For example, if a qualifying homeowner’s base year is 2011, and the property taxes assessed for 2011 were $5,000, if the property taxes assessed for 2014 are $7,000, and the homeowner’s income for 2014 is within the limitation, he/she will receive a check from Trenton for $2.000.

The income used to determine eligibility includes all income – both taxable and nontaxable.  It includes otherwise tax-exempt interest and the full amount of Social Security or Railroad Retirement benefits. 

Like the NJ state income tax income is categorized by source.  Losses in one category can be applied against income from the same category, but cannot be applied against income from another category.  A $5,000 capital loss from the sale of one stock can offset a $2,000 capital gain from the sale of another stock.  But the $3,000 in excess losses cannot be applied against $25,000 of gross Social Security benefits.  The PTR application would show $25,000 in Social Security income and 0 in capital gains.

Ever since 2010, in order to balance the state budget in the eleventh – or actually twelfth - hour, the legislature has reduced the income threshold for the current year, or the second year of comparison, from $80,000 (or $80,000 indexed for inflation) to $70,000.  If the applicable income for the year is under the $80,000 amount but over $70,000 there would be no check issued – but the qualifying homeowner would be able to create or maintain a base year tax amount.

The PTR application forms (PTR-1 for first-time applicants and PTR-2 for previously approved homeowners) – with a blue cover – are mailed out in mid to late February, and the initial deadline for filing the application is June 1^st (or the next appropriate business day).  However each and every year the current sitting Governor, as proof of his “compassion” for seniors and the disabled, announces at the end of May that the filing deadline has been extended.  It has been extended a second time in the past – ultimately until October 15^tt.  This has been going on for years. 

And it has been done again for 2014 PTR applications.  The page for “Property Tax Relief Programs”, and subsequent pages for the “Property Tax Reimbursement (Senior Freeze) Program”, on the website of the NJ Division of Taxation all state in bold print –

“Filing deadline for 2014 Senior Freeze (PTR) Applications extended to October 15, 2015.”

And an official press release has been issued – click here.

It is good news for NJ senior and disabled homeowners – and those NJ tax preparers who have been holding their breaths because of PTR applications still to be done.

The word is still out on whether the income threshold will once again be dropped to $70,000.  We will not know that until the end of June or beginning of July.

If the idiots in Trenton (members of Congress are not the only idiots) are going to extend the filing deadline for the PTR applications till October 15^th each and every year why don’t they just make the initial deadline October 15 and not June 1?!?

Why – because doing so does not allow the Governor to gain points with seniors and the disabled by extending the deadline at the last minute!

The current press release says –

“We are extending the filing deadline for the Senior Freeze Program to ensure that every senior and disabled resident of New Jersey who is eligible for the program has an opportunity to apply.”

I also believe that one of these years, when tax preparers and homeowners are so used to the deadline extension that they assume it will be automatic, the DFBs in Trenton (clean version is Damned Fool Bureaucrats) in Trenton will surprise everyone and not extend the deadline – screwing senior and the disable out of tens of thousands of dollars in property tax relief so that the legislature will have more money to waste on pork and entitlements.

Am I being too cynical?  What person who has grown up in NJ – especially those who have grown up, as I did, in Hudson County – is not cynical when it comes to the actions and motives of politicians?

TTFN

THIS JUST IN – FROM THE NJ DIVISION OF TAXATION

I just received the following email (highlights are mine) -

 

“The New Jersey Division of Taxation will begin mailing the 2012 Homestead Benefit applications to eligible homeowners in early October. You indicated on your 2011 Homestead Benefit application that you preferred to receive your 2012 application by E-mail instead of receiving a paper application packet in the U.S. mail.

 

You will receive this E-mail on or about October 9, 2013 which will contain a link to file the application from the Division of Taxation’s website.

 

If you do not receive an E-mail from the NJ Division of Taxation containing the filing information for your 2012 Homestead Benefit application by the end of October 2013, please contact the Division of Taxation’s Customer Service Center at 1-888-238-1233.

 

The application is due by November 22, 2013.”

 

And while at the NJDOT website this morning I found the following warning (the highlight is theirs) -

 

“The Division of Revenue and Enterprise Services is alerting all New Jersey businesses to be aware of mailings concerning an ‘Annual Corporate Records Form’.  A private company is sending the mailings, which solicit a fee of $125 in return for the recording of corporate shareholders, directors and officers.  Business should be aware that the State of New Jersey does not require this form to be filed. Businesses should not be confused by the official appearance of the mailings. They are not connected with the State of New Jersey’s business entity annual report process, and the State has no affiliation with the sender.

New Jersey businesses that receive the mailing may report this by:

 

1.   Filing a complaint with the New Jersey Division of Consumer Affairs, PO Box 45025, Newark, NJ 07101.

 

Visit http://www.nj.gov/oag/ca/complaint/ocp.pdf to download a complaint form; or

 

2.   Contacting the United States Postal Inspections Service to report mail fraud at: (877) 876-2455 or

http://postalinspectors.uspis.gov/forms/MailFraudComplaint.aspx.

 

Corporate officers and business representatives who have questions about these mailings and the legal requirements to submit corporate annual reports to the State of New Jersey should contact the Division’s Hotline at 609-292-9292.”

 

I seem to recall receiving a similar solicitation in the mail a while back for my PA corporation.  I threw it in the trash.  

DEFENDING THE DEDUCTIONS FOR TAXES AND MORTGAGE INTEREST

The Max and Dave “clean slate” approach to tax reform, which I wholeheartedly support, begins by eliminating all “tax expenditures”.  The new Tax Code begins “everything is taxable” and “nothing is deductible” and adds back only those “excepts” (exclusions, deductions, and credits) that are absolutely necessary.

A recent BUZZ installment referenced “Homeownership Tax Deductions, Credits and Exemptions” from REAL ESTATE METRO.  It listed the many “tax expenditures” related to home ownership.  Topping the list were the deductions for real estate taxes and mortgage interest.

The Office of Management and Budget reports that for 2012 the deduction for mortgage interest “cost” $87 Billion and the deduction for state and local taxes cost $33 Billion.

The TAX FOUNDATION’s “Case Studies” on eliminating tax expenditures said this about the “Property Tax Deduction for Owner-Occupied Housing” -

“Two criticisms are that it is mostly claimed by upper-income taxpayers, and that it softens people's opposition to high taxes and wasteful spending by local governments, because some of those taxes can be written off at the federal level.”  

And this about the “Mortgage Interest Deduction for Owner-Occupied Housing” -

“The chief criticisms are that it is mostly claimed by upper-income taxpayers, and that housing is given less punitive tax treatment than many other forms of saving or investment.”

Regarding the deduction for home mortgage interest, in a TWTP post from June of 2010 I noted –

“Howard Gleckman posed the question “Should We Dump the Home Mortgage Interest Deduction?” at TAXVOX, the blog of the Tax Policy Center.

Kay Bell added her two cents to Howard’s commentary in “Is It Time to Kill the Mortgage Interest tax Deduction” at DON'T MESS WITH TAXES.

A recent tweet led me to the article “Mortgage Deduction: America's Costliest Tax Break” By Jeanne Sahadi at CNNMoney.com from April.”

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. 

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 never seen the issue of “geographic equalization” discussed anywhere else, and would like to hear from others on this issue.  Please comment on this post!

TTFN