Millions of others will find their homeowner deductions worth less in the future. On the other hand, some higher-income homeowners will eventually be able to reap more benefit from their real estate deductions. The reason is that the standard deduction for married couples will increase sharply, although it will be phased in gradually over five years beginning in 2005. The increase will mean several million couples who now itemize their deductions will end up claiming the standard deduction instead. For these couples, the tax code would no longer provide a cent in tax benefit for owning a home.
Deductions are worth less when tax rates are lower.
For most homeowners, the impact of the rate reduction will be relatively small because most tax brackets will be cut gradually and by only a few percentage points. But there will be a bigger impact for some middle-income couples later this decade. Starting in 2005, the new law will gradually enlarge the 15 percent tax bracket for married couples so that more income gets taxed at the 15 percent rate instead of the next higher rate. As a result, some couples who are now in the 27.5 percent tax bracket will end up dropping into the 15 percent bracket. The new law will gradually eliminate that automatic cutback starting in 2006.