The Dance of Deduction: Trump’s Tax Plan Gives Advisors Homework

A wrinkle in the Trump administration’s recently released tax plan on mortgage interest tax deductions is troubling news for middle-class Americans looking to buy a home.

And they aren’t going to like their advisors letting them know about it. According to a new report from Trulia, the new tax proposal could put many of the financial advantages of buying a home at risk.

“The Trump proposal does not do away with the mortgage-interest tax deduction, but it doubles the standard deduction and eliminates the ability of filers to deduct state and local taxes, including property taxes,” said Ralph McLaughlin, chief economist at Trulia. “While raising the standard deduction will undoubtedly put more dollars into the pockets of homeowners, it’s less clear how these changes affect the financial advantages of buying a home.”

As it stands, tax breaks are available for buying a home if the annual mortgage interest paid “is greater than the current standard deduction of $12,700.” Trump’s tax reform plan would increase that number to $24,000, Trulia said.

“While this means that many households will be able to write an extra $11,300 off their income, raising the standard deduction will also lead to a scenario where some homebuyers would no longer take the mortgage-interest tax deduction because the standard deduction would be greater,” McLaughlin said.

To Rent or Not to Rent

For these buyers, the financial advantage of making the switch from renting to homeownership would be reduced, he said.

The tax would mostly impact homebuyers “making between $68,540 and $129,422 looking to buy homes priced between $358,000 and $676,000,” he explained.

The mortgage tax proposal is heavily weighted in favor of wealthier homeowners, industry insiders say.

“Trump's tax plan could potentially favor wealthy homeowners because households with mortgage balances between $100,000 and $500,000 could see an income tax increase,” said David Hryck, a tax lawyer at Reed Smith in New York City. “Households with a mortgage greater than $500,000 would actually see a net decrease in tax liability because of the shift in income tax brackets.”

The proposal will also drastically change the benefits of the mortgage tax deduction for most of middle class, he added.

“Under our current tax code, the top 43 percent of household earners can itemize their mortgage interest if they purchased a home,” Hryck said. “Under the proposed tax plan, that number would shrink to just the top 17 percent.”

Some financial advisors say the tax proposal is so onerous to younger buyers, they should hold off on buying a home.

“If this bill were to pass, I would end up recommending most of my clients to rent
instead of buying,” said Clint Gossage, founder of CMG Financial Consulting in Scottsdale, Ariz., whose clients are typically in their 20s to early 40s.

There are “clearly other reasons” to own a home, he added, but many younger families have already held off on home ownership.

“I can't see them deciding to change their view if they weren't getting the tax benefits that a home has historically provided,” Gossage said. “The cost of owning, maintaining, and repairing a home won't make sense to a lot of families who are making the rent or own decision.”

Many Deductions to Choose

Not every tax expert agrees with that sentiment, however.

“The only reason why middle-class homeowners may not take the mortgage interest under the Trump tax plan is that, with the proposed increase in the standard deduction of $12,000 for single taxpayers and $24,000, many taxpayers won’t need to take the mortgage interest or any other itemized deduction,” said Crystalynn Shelton, tax specialist at FitSmallBusiness in Burbank, Calif.

Their standard deduction will be more than their itemized deductions, Shelton explained.

“You don’t have to be a tax expert to know that you take the biggest piece of the pie, which, for most middle-class homeowners, may turn out to be the standard deduction,” she noted.
Perhaps the most pragmatic take on the proposed mortgage tax deduction is that it will never see the light of day.

“The likelihood of the mortgage tax deduction getting passed is slim,” Gossage said. “A big part of the American dream has been to own a home and I don't think either party wants to give a reason for families to decide against home ownership.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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