"Middle-class families will not see much tax relief in this plan," says Joseph Kirchner, senior economist at realtor.com®, adding, "In order to pay the large tax cuts to the wealthy, programs that help home buyers purchase homes and help builders bring homes to market will likely be drastically cut."
At issue are income-tax deductions, which reduce an individual's taxable income, and therefore one's overall tax bill. Currently, taxpayers can choose whether to itemize their tax deductions—writing off specific expenses—or take one big standard deduction instead. The new tax plan nearly doubles the standard deduction. Sounds good, right?
But by boosting the standard deduction, the plan renders the mortgage interest deduction nearly useless. Buyers can typically use the deduction to shave $8,000 to $10,000 off what they owe the government in their first year of homeownership, says Kirchner. Still, the bulk of taxpayers are more likely to opt for the standard deduction, which would total $12,000 for individuals and $24,000 for married couples who file jointly.
The plan also eliminates most types of itemized deductions, including payments for state and local taxes—which include property taxes. (It does retain the deduction for charitable gifts—but again, considering the size of the new standard deduction, this will mostly benefit wealthy people who write big checks for charity.)
The plan must still be approved by Congress.
"This proposal recommends a backdoor elimination of the mortgage interest deduction for all but the top 5% who would still itemize their deductions," National Association of Realtors® President William Brown said in a statement. "When combined with the elimination of the state and local tax deduction, these efforts represent a tax increase on millions of middle-class homeowners."
This could make it more expensive to own a home and could drive up prices in pricier, coastal cities, says Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, a liberal-leaning think tank based in Washington, D.C.
However, the mortgage interest deduction isn't really what pushes people buy a house, says Roberton Williams, senior fellow at the Tax Policy Center in Washington, D.C. Instead, it encourages those who have decided to buy to spend more money on a larger house, because they are likely to get some of that money back on their tax return.
Details of the proposed new tax code were scant. The number of tax brackets would shrink from seven to three: 12%, 25% and 35%. It is unclear, however, which income levels would be included in each. That's a boon to the ultrawealthy who are currently in a 39.6% bracket, but a fourth, higher bracket could be created. The plan would also raise the child tax credit for lower-income and middle-class families.
"With significant and meaningful tax reform and relief, we will create a fairer system that levels the playing field and extends economic opportunities to American workers, small businesses, and middle-income families," reads the plan crafted by the president and Republican leaders.
But the new tax code would ax personal exemptions, which provide breadwinners deductions of a little more than $4,000 per family member, including themselves. That could hurt parents with several children.
"Many households, particularly larger ones, will have higher taxable income even though the standard deduction is [nearly] doubled, because they're losing the personal deduction," says the Tax Policy Center's Williams.
Clare Trapasso is the senior news editor of realtor.com and an adjunct journalism professor. She previously wrote for a Financial Times publication and the New York Daily News. Contact her at firstname.lastname@example.org.