South Dakotans Second Least Likely to Itemize Deductions

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:

Federal Itemized Deduction Claims by State, 2012. From USA Today, 2015.04.12. (click to embiggen!)
Federal Itemized Deduction Claims by State, 2012. From USA Today, 2015.04.12. (click to embiggen!)

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.


10 Responses to South Dakotans Second Least Likely to Itemize Deductions

  1. Roger Elgersma

    so when comparing after tax income, there are some things that the typical South Dakota schemes are not adding in or subtracting out. When wages are lower, it just does not make sense to act like that does not matter.

  2. I can’t nail down the connection with the data at hand, Roger; there could be some more obvious or subtle explanation for our lower rate of itemizing. But in my experience with tax returns, you don’t get into itemizing unless you’re talking to taxpayers with lots of income.

  3. mike from iowa

    It costs much more to have taxes done if you itemize. If you claim standard deductions you don’t need to itemize. Itemizing tends to get more scrutiny from the IRS,etc.

    Farmers in iowa pretty much itemize because they get tax breaks on feed,seed,livestock,equipment and a whole host of stuff,but they better have accurate sales slips for everything.

  4. There is generally a relationship between income and real estate values in a given area with few exceptions like the Silicon Valley region in California. But South Dakota incomes are out of the norm in terms of their tendencies or levels and, thus, out of the greater scheme of tax laws designed to benefit the perceived national middle and upper middle-class economic statuses. While regions like the Silicon Valley region uniquely deprive the middle class of access to the affordability of their own home (even after the recent real estate bubble and collapse) and leave such tax deductions almost completely to the out-of-sync benefit of the rich, except for those middle class who acquired their homes before such region(s) where victims of hyper demand and inflation, but then local property tax costs tend to force the middle class out quickly and from such a tax benefit…..Just another example of how tax laws almost always benefit the rich unless there is an active intent for a more progressive tax system.

    In addition, I don’t know if we should be proud of this, but perhaps the trade-off is that South Dakota might on a per capital basis benefit greater from the earned income tax credit, because of our inherently lower wages, and this credit buys more in South Dakota, too. Although, I am not so sure this is totally true nor a good thing. If true, it would merely be further proof that our wages are too low and once again we are out of the scheme of the perceived middle and upper-middle economic statuses. And if it is true, South Dakota’s middle class is once again deprived. Since many of the homeowners are the ones mostly too make just enough to not qualify for the EIC and and their house is not worth enough to qualify beyond the standard deduction…. a double whammy to our perceived notion of what it means to be a member of the middle class in South Dakota….. and as a ranking member of the Senate majority, I challenged John Randolph Thune and his fellow Republicans to use their power to do something about this. They are always talking about the burden of taxes. Well, here is a burden, why don’t they do something about it?….. ;-)

  5. Earned Income Tax Credit—that would be another example of our off-budget dependence on Uncle Sam, like farm subsidies and Medicare… but wait! According to IRS stats for 2013, the average EITC claimed by South Dakota taxpayers was the 12th-lowest in the U.S. The national average EITC claimed was $2,407; South Dakota’s average was $2,143, 11% lower. Interestingly, among the 11 states taking lower average EITC was Minnesota at $2,124. All of our neighboring states were below the national average.

    So South Dakota’s low rate/average claim of itemized deductions suggestions we have fewer high-rollers… but lower EITC payouts would suggest we have fewer low-income filers able (or willing?) to take advantage of that end of the tax code. How do we explain that?

  6. mike from iowa

    I didn’t realize the EITC was still available. Wingnuts wanted to make it disappear because they claimed it was giving tax refunds to poor people who didn’t pay taxes. The problem,as usual,with wingnut thinking is korporate amerika receives tax refunds when they don’t pay taxes.

  7. Heck yeah, Mike! EITC is totally available. And EITC should make wingnuts happier than entitlement programs. For the lowest-income workers, EITC gets bigger as they earn more. No work, no EITC. More work, more EITC. Then when you reach a certain income threshold, the EITC comes down again, but never enough to punish someone for making more money.

  8. Don Coyote

    Two items driving the reduction in itemized tax returns are reduced state income tax collections (recession) and lower interest rates on mortgages, both items which are deductions in itemized returns. With exception of 2010, the standard deduction has increased every year since the 1979-1984 period, pushing more people into the non-itemized group. It’s scheduled to increase another $100/single in ’15.

  9. Don, we’re talking about why South Dakota’s itemized deduction rate and average amount are less than that in other states. Your items may explain national trends, but how does either item you offer explain the difference between South Dakota and other states?