In 2012, my wife and I moved from New York to Virginia and bought a house. To make matters worse, our health coverage comes in the form of a health savings account, I started working from home full-time, and we both made some freelance income. Being either too proud or too stupid to pay someone to do math for me (I like to think proud), I still insisted on doing the taxes. Here are a few things I learned.
First of all, the tax system’s treatment of homeownership is completely absurd, even if you start with the assumption that subsidizing homeownership is something the tax code ought to be doing. (For the record, I do not start with this assumption, though now that I have a mortgage I’m glad policymakers do.) Take private mortgage insurance (PMI), for example. This is something homebuyers need if they put less than 20 percent down. In other words, it’s a cost associated specifically with risky loans. And yet it’s deductible.
When I tweeted about this, Josh Barro pointed out that it’s really not that crazy: It’s no different from the standard mortgage-interest deduction. PMI and interest are just different ways of charging for risk — without PMI, banks would charge higher rates, and the resulting higher interest payments would be deductible. Which actually highlights how rotten the entire system is: Mortgage interest represents risk, so by allowing a deduction for interest, the federal government is subsidizing the risk of homeownership rather than homeownership itself. If two people with the same income are considering buying the same house, but one has worse credit, the government actually offers a higher subsidy for the riskier loan. Barro suggested allowing some kind of deduction based on principal; I think I’d prefer a flat credit to all new homeowners for the first however many years.
The tax system’s treatment of home offices is a disaster, too, and while the upcoming simplification will help, it won’t fix everything. If I removed everything from my office but my National Review computer, I could deduct it. If I removed everything from the room except the computer I use to work on video-game reviews I get paid for, I could deduct it. But since I don’t use the room exclusively for one type of work or the other — and especially because I also have my guitars and books and other personal property lying around — I can’t deduct anything at all.
The existing home-office deduction makes sense for people who run a normal business out of their house — people who meet with clients, or have a workshop where they make things to sell, or whatever. But there are also a lot of people like me — people who just need a computer to work at, and do that at home rather than using any sort of employer-provided office (that the employer could otherwise deduct on his end). What difference does it make whether I work in an office with a single computer, work in an office cluttered with junk, or take my laptop downstairs and work on the couch next to the cat? For that matter, why should I get a bigger deduction just for choosing a bigger room as my office and using the space inefficiently? Why should people who work and live in small apartments be left out? Any contract work done at home should trigger a deduction for a percentage of the money earned thereby, and full-time telecommuting should trigger a flat credit. How much space your computer takes up should be your own business.
One final gripe: You should not need to fill out a form simply because you have a health savings account. So long as the money was taken out pre-tax and no money was spent on non-qualifying expenses, the form is just extra paperwork. And if you have a zero on line 2, you should skip right to line 13. And the form should make clear that “employer contributions” include money taken from your paycheck pre-tax.
Anyway, Happy Tax Day!