The TrumpAdvantagCare Tax Bill is out of the reconciliation process, and we’re getting a better idea of what is in for it. For the non-super-wealthy, will it be good for us? The answer differs for each individual, of course, but the likely answer is: in the short term, it may be, but the pooch must be screwed at some point. But what do we care — that’s someone else’s problem, right? Is it good for the country? Again, the depends on your opinion, but you can simply ask yourself whether a tax bill that INCREASES the deficit is a good thing, and whether the ultimate goals of the tax bill down the road move society is a better direction. You’ll have your answer.
I do suggest that people read some of the summaries going around. PBS had a particularly good one. Some of the things we feared would happen did not:
- Graduate Student Tuition waivers are not counted as income to the student.
- Medical expenses are still deductable
- Classroom teacher expenses are still deductable
- Student loan interest is still deductable.
- The Johnson Amendment was not repealed.
Still other provisions are better than they might have been:
- State and local income taxes are still deductable, but with a cap of $10K
- New mortgage loan interest is still deductable, but capped at $750K.
There are also a number of interesting implications in the bill that aren’t explicit (and perhaps you didn’t think about there). Here are a few that struck me.
State and Local Income Taxes
Although the deduction was preserved, it is limited to $10K. In California, that’s bubkis. A middle-class worker will have almost $10K in property tax, and the income tax over the year could be anywhere from an additional $6K to $10K. High income tax states will likely figure out a work around: here’s an article that describes how it might be done. Quoting from that article:
If [the SALT limitation] happens, the easiest workaround for states like New York and New Jersey would be to lower income taxes and raise property taxes, up to the point that residents can still deduct them. California doesn’t have that option. Its Proposition 13 restricts property taxes to 1 percent of the property’s value, so any change to property taxes would need to go on the ballot for a vote. But California could shift its tax burden away from income tax — one of the highest in the nation —and onto employers via the state payroll tax. Unlike individual taxpayers, employers would still be able to deduct this state tax on their federal returns.
Other options outlined in the paper include making it easier for taxpayers to make charitable contributions to state and local governments. Congressional Republicans plan to maintain the existing write off for donations to charity, which means Californians could deduct those contributions from their federal taxes.
And the state could provide tax credits in the amount of the donation, which taxpayers could use to lower their state income tax liability, as well. As University of California Hastings College of the Law Associate Professor Manoj Viswanathan observes in another recent analysis, “Many more taxpayers could take advantage of state-level initiatives that essentially reclassify state and local tax payments as federal charitable contributions,” essentially allowing them to “double dip” and obtain both state and federal tax benefits from a single donation.
This could have the unanticipated side effect of reducing the amount brought in through Federal Taxes even more: a true “be careful what you wish for.”
Donations to charity — cash or non-cash — are deductable if you itemize your returns. This is key to most non-profits donation strategy (and I’m not talking just churches here, but theatres and charitable foundations and hospitals and universities): Push to get the donations before 12/31, so they can be deducted. The charitable contribution isn’t going away. However, the standard deduction is being increased dramatically, meaning fewer people will be itemizing. Except for those that donate out of altruism, this may mean a drop in charitable contributions because — well, why do it if it doesn’t bring you anything?
This isn’t good news for your local non-profit theatre or foundation.
For most people, their house is their largest investment. But in certain areas, housing prices are already sky-high — often those high tax areas that are also being hit by the SALT limitations and the lower cap on the mortgage interest deduction. When most houses are above $750K, what will that do?
One prediction: It will cause housing prices to drop in every state:
…despite studies that have indicated that the mortgage interest deduction might not be good tax policy, it’s been good for the real estate market. Without it, the National Association of Realtors anticipates that housing prices will fall by at least 10% across the board. The organization recently released a report breaking out on a state-by-state basis how the proposed tax reform efforts might hurt home values. Their findings? The NAR estimates that home values would fall in every state
If you own a house, this will hit you when you try to sell or pull equity out of your house. It could create another housing burst, as loans go underwater due to property value drops.
Another lesser known provision are the changes made to alimony. Under previous tax law, alimony was deductable by the one paying, and treated as income by the one receiving. Under the new bill, that’s reverse: it isn’t income to the recipient, but isn’t deductible by the one paying. It is predicted that this will make divorces harder for the non-wealthy, because the tax on alimony make make it an economic impossibility. This will hurt women.
Of concern to me, of course, a provisions related to commuting. From what I was able to find out, neither the Senate nor House bills touched the $255 subsidy that vanpool riders can receive (whew!). It does look like bike commuting provisions are going away,; as the only amendment to section 132(f) is: (8) SUSPENSION OF QUALIFIED BICYCLE COMMUTING REIMBURSEMENT EXCLUSION.—Paragraph (1)(D) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.’’.