I was just reading an article concerning the new proposal to allow people who don’t itemize their deductions to still deduct some charitable contributions for their federal income tax. The article claimed that 70% of taxpayers don’t itemize. Can that be right? I’ve itemized for the last 10 years because I have a mortgage and itemizing saves me money. It’s not much money, because it’s a relatively small mortgage. Still, does such a small percentage of taxpayers have mortgages large enough to justify itemizing, or are they just being generous?
First of all, that proposal to allow non-itemizers to deduct charitable contributions mysteriously disappeared from the final version of the new tax law. More than likely it disappeared because non-itemizers don’t have a powerful group to lobby for them.
But yes, the vast majority of taxpayers do not itemize their deductions, simply because their deductions do not exceed the $7,350 standard deduction for married couples or the $4,400 standard deduction for singles. And those of us who do itemize do so mostly because of the mortgage interest deduction. Why is it there? Largely because of the powerful lobbying efforts of the financial services industries, as well as the real estate and home builders’ lobbies. Is it a good thing? Would someone be buying a house if you couldn’t deduct the mortgage interest? Probably. Would that someone be applying for as large a mortgage if the interest weren’t deductible? Maybe not. Perhaps the real estate market is artificially inflated because of the mortgage intertest deduction, and maybe if the interest weren’t deductible, we would see a corresponding decrease in housing prices. (And maybe next May I’ll grow a tail and run in the Kentucky derby!)
As to why such a significant aspect of tax law would be directed to a minority of the taxpaying public, consider this: fewer than 2 percent of Americans who died last year left estates large enough to owe any estate tax at all. But that didn’t stop a huge firestorm of debate over doing away with the estate tax, because for those it DOES apply to, very big bucks are involved. And since interest on mortgages up to a million dollars is deductible, there are some very big bucks involved there, too. I’d bet you’d hear a howl from here to DC and back again if an effort were mounted to limit the deductiblity of mortgage interest to debt of $500,000 and below, even though the vast majority of us would not lose our deduction.
Make no mistake - monied interests drive much of the tax policy.
I’m shocked, shocked!
Although this is very interesting, I didn’t really ask for a discussion of how our tax code evolves. What I’m really curious about is if it’s true that 70% of taxpayers don’t itemize. Now, if you owe $100,000 on a mortgage at 7.5%, then you are over the break even point for a married couple itemizing already. Can it be true that only 30% of taxpayers fall into this category?
According to IRS Publication 1304 (rev Apr 2000), 30% seems to be right, based on 1997 figures. On their 1997 returns, 36,624,595 filers itemized and 84,844,302 didn’t. Given time (and MS Excel instead of MS Works), I could probably get you a breakdown by income ranges. I used the April, 2000 Pub 1304 because it was available in PDF format. More recent info is available in Excel. Various reports, including tons of statistical data, are available at http://www.irs.gov.
Another point to consider is that for many taxpayers who are just at or slightly over the break-even point, the cost of preparation (for those too lame to do 5th grade math) and the hassle of documentation might make them choose to take the standard deduction. There is also a belief that itemizing makes an audit more likely (Of course the fact that if you don’t cheat, you have nothing to fear from an audit is lost on most people).