How GOP Tax Overhaul Will Affect CT Homeowners

The Republican tax bill is heading to President Donald Trump’s desk for final approval, which means that some Connecticut taxpayers are likely to feel the sting of decreased deductions. A new analysis by real estate website Zillow shows that many nutmeggers are going to lose out due to a lowered cap on the mortgage interest deduction (MID).

The MID allows homeowners to deduct the interest paid on their mortgages from their taxable income, which decreases their overall tax bill. Under the current law, the MID is capped at $1 million. But under the GOP tax bill, that would drop to $750,000. The reduction would only apply to new mortgages, not existing ones.

Many tax filers in high-tax states like Connecticut benefited from current tax rules which allowed mortgage interest along with state and local taxes to be deducted from federal tax returns.

The new tax bill is also reducing the State and Local Tax deduction (SALT) to $10,000. This led to Business Insider Fairfield County the fourth-worst place to buy a home under the bill.

A narrative that played out during the debate over the tax bill was that current tax rules effectively subsidized high-tax states by allowing residents to pay less on federal returns, however, the opposite is true. The federal government collected more than $16,500 in tax revenue per capita in Connecticut during fiscal year 2015, which is the fifth-highest in the nation, according to the U.S. Census Bureau.

High-tax states including New Jersey, Massachusetts, New York and Rhode Island are all in the top 10 of revenue per capita. Low-tax state Florida's per capita contribution is $8,762 for comparison.

According to Zillow, more than 80 percent of homes in Fairfield County have mortgage interest in the first year that would be high enough to warrant itemizing taxes, instead of taking the standard deduction. Under the new bill that number lowers to 31.62 percent. The bill doubles the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly.

In Hartford County it is worth itemizing for more than 55 percent of newly bought homes, but that figure would drop to less than eight percent under the new bill. Litchfield County would see a drop from 61.53 percent to 14.29 percent, Middlesex from 67.34 percent to 9.21 percent, New Haven from 46.99 percent to 7.54 percent, New London from 41.31 percent to 4.99 percent, Tolland from 56.14 percent to 4.25 percent and Windham from 23.36 percent to .77 percent.

All of this could have a chilling effect on real estate markets across the country, which are still recovering from the 2008 housing market crash. According to Moody's, the bill could reduce national home prices by as much as 5 percent. And it would be worse for areas like Connecticut.

"The Northeast Corridor, South Florida, big midwestern cities, and the West Coast will suffer the biggest price declines," Moody's writes. "Counties such as Westchester, NY, Cook IL and Delaware PA will experience double-digit price declines."

Zillow's analysis is based on the estimate that homeowners are in their first year of paying back their loan — when interest payments are largest — and they have a 30-year, fixed-rate mortgage at a 4-percent interest rate. County property tax numbers were based on 2016 numbers from the National Association of Home Builders.

A portion of tax filers who would have itemized could still see a deduction in federal taxes. Those who itemize, but whose deductions come out to less than $12,000 for singles and $24,000 for married filers would still win with a bigger deduction. On the other hand those that would itemize under current rules with full mortgage, state/local tax deductions and other qualifying deductions with a total greater than those figures could lose out. Other portions of the bill could help or hinder an individual tax filer's situation.

Connecticut's commissioner of the Department of Revenue Services estimated that 75 percent of the tax cut benefits would go to the state's top one percent of earners while the rest of the state would see a 1.2 percent cut on average for the previous House version of the bill. Proposals to reduce corporate and pass-through business income could be a boon to the economy, he said.

There is also the worry that Social Security and Medicare funds would be cut in order to reduce the estimated deficit effect of the tax bill.

Feroze Dhanoa, Shannon Antinori, and Alex Costello, Patch staff, contributed to this report.
Photo: Andrew Harnik/AP