Speaking of dependence on federal handouts, the Black Hills Knowledge Network posted last November that South Dakotans do not claim nearly as much of a housing subsidy via the mortgage interest deduction as homeowners in other states.
Of course, the mortgage interest deduction only matters if you are itemizing your deductions on your federal income tax return instead of taking the standard deduction, which for this happily married couple this year was $12,400. BHKN found that the highest average mortgage interest deduction claimed in South Dakota in 2013 was just over $9,000 in Lincoln County. So even those high rollers, to make claiming the mortgage interest deduction worthwhile, would have to come up with about $3,400 more in medical expenses, charitable contributions, state and local taxes, and other documentable, deductible expenses. (Those of you still sifting through your shoeboxes of receipts may want to stop a moment and ask yourselves: are you really going to reach $12,400? And can you find an extra thousand or two beyond the standard deduction to make up for the extra time and effort you’re burning, plus the increased chance of audit you’ll face when the IRS sees you itemized?)
As it turns out, the vast majority of South Dakota taxpayers don’t find all that itemizing worth the effort. USA Today provides this graphic showing that more than 80% of South Dakotans settle for the standard deduction:
Only 18.3% of South Dakota taxpayers claimed itemized deductions in 2012. The only state with a lower itemizing rate is West Virginia. Nationwide, 31.6% of taxpayers itemized.
Even when South Dakotans itemize, they don’t find as much mortgage interest or as many receipts to throw on the pile to knock down their tax liability. South Dakota itemizers averaged a claim of $23,989, about 13% lower than the national average of $27,502. Nineteen states have a lower average itemization claim. I would speculate that a fair amount of those differences come from the data BHKN looked at: South Dakota home values are lower than values in several other states, meaning homeowners in California, Arizona, Nevada, New York, New Jersey, Maryland, and Florida are going to have more mortgage interest to claim.
I’d additionally speculate that South Dakota has fewer high-income earners buying bigger houses, making more charitable contributions, and racking up enough taxable income well beyond the standard deductions and exemptions to make itemizing deductions worthwhile. But I welcome your economic observations on alternative explanations for South Dakota’s remarkably low rate of itemizing deductions.