We all are wondering what the Republicans are doing about the 2017 Tax Cut and Jobs Act and how it will affect us. I’ve done some research and spent time reading up on the subject; this is my take. If you want a copy of the 77 page summary from the House Ways & Means Majority Staff, just send me your email and I’ll forward the summary over to you. (firstname.lastname@example.org)
Let’s start with some background. President Trump has nothing to show thus far for his legislative agenda with the exception of the appointment of Supreme Court Justice Neil Gorsich. This is not a great start since the Republican Party owns both houses of Congress, although only by a two vote margin in the Senate. He desperately needs this legislative victory going into the 2018 midterm elections.
His political base is certainly NOT New York, New Jersey, California or Illinois. These are high tax states that include large swaths of expensive real estate, more than their share of high net worth individuals, and a more educated and enlightened voting base with a more liberal frame of mind. Joe Budweiser is living in Ft Wayne or Shreveport or Kansas City or Cheyenne, working on a job at 1/3 of his previous factory pay, unable to send his child on to college, may have faced the repossession of his home but certainly went through painful belt tightening the last two decades and feels that his country had forgotten about him until Donald Trump came along.
This should give you some idea where the policy focus was in the deliberations between Capitol Hill and the White House as both houses of Congress approached the final wording on their separate bills. Mr. Trump recognizes political reality and knows he needs to shore up his declining political base. When policy decisions are made, they are not made in a political vacuum that rewards the blue states while ignoring the red states.
Interest Deduction on Mortgages
Yes, it’s true. Both houses have the same provision that limits deductions on interest for home mortgages to the first $500,000 of a loan. But it’s not as bad as it seems. If you’re a high net worth individual that wants his full $1.0M+ mortgage interest deduction, than you are qualified for a $5.0 million home based on 20% LTV. And if that’s true you probably own other property. And if that’s true you can easily pull out $500,000 from the equity of one or all of your income property holdings. Even if you didn’t, the net effect is not as disastrous as you might think. At a 4% rate on a $500,000 loan, your interest is $20,000 annually which taxed at the top federal bracket of 39.6% results in about an increase in your tax bill of $8,000. You can afford it and this will be offset by some other provision of the bill as I will discuss but you need to do two things right away; first, recognize that we live above our means in this country with a $20 trillion dollar debt and we have to make amends for that, and second, put me in your will.
Alternative Minimum Tax
Yes, it’s also true. Both proposals eliminate the ugly AMT which has cost all of us a tremendous amount of money by reconfiguring our taxable income after we correctly reduce it with legitimate deductions. This was a wise decision designed to eliminate some of the complexities of tax preparation, which is a much appreciated move.
Both bills double the standard deduction to $24,000 so less taxpayers will be burdened by itemizing their deductions. Estimates from the Joint Tax Committee are that only 10% of taxpayers will choose to itemize. Another way Mr. Trump is attempting to lower our tax preparation costs.
Property Tax Deduction
Ouch. This one hurts. Our property taxes will only be allowed as a deduction up to $10,000. I get it. Joe Budweiser is not too happy that he is forced into a position of paying $1,200 in property taxes on his double-wide, while a Wall Street gillionaire can reduce his taxes by the full amount of his $80,000 property tax bill in New York City on his $8,000,000 Park Avenue penthouse. Joe feels he is essentially subsidizing the Wall Street gillionaire. From his vantage point, it’s another example of how the tax code favors the rich and forgets about the rest of us.
My favorite. The exempt amount is doubled to over $11M and eliminated altogether by 2024. I’ve always found this tax to be a moral transgression. We work all of our lives, pay our taxes and provide for our children and the last act of the government is to take 55% of our hard-earned estate away from our heirs. That’s just plain wrong on a whole variety of moral plains. I plan to spend every penny of my estate traveling with my gorgeous trophy wife, but what little I have left I want to leave to my children with no interference from Uncle Sam.
Both bills will reduce the brackets from the current seven to four, lowering the brackets and increasing the threshold numbers except for the top bracket which remains at 39.6% of taxable income. This is a direct political shot for Mr. Trump’s constituency, so they see the wealthy aren’t getting a tax break under the brackets.
Corporate Tax Rate
Down to 20%? Mr. Trump wants to attract capital back into the United States rather than places like Ireland, which is commendable. But this is going to cost a lot of loss revenues and should have been coupled with a requirement to transfer offshore accounts loaded with cash back into the United States which is where they belong. This issue is somewhat addressed with the lowered 10% tax on foreign earnings.
Pass Thru Rate of 25%
This reaches a broad landscape of taxpayers in the country. If you still own your parent’s home with your siblings in an LLC, or you have a one-man business operating as a Chapter S Corp or partnership, then your tax rate is drastically reduced. I know it benefits the super-rich as well, but it also draws across the taxpayer canvas to everyone who has some sort of business or investment vehicle.
The deduction of $250,000 (for single homeowners) or $500,000 (for married couples) deduction permitted in the calculations of capital gain at the sale of a residence now has tighter rules. Homeowners must have lived in the residence five of the past eight years, and the deduction cannot be used more than once every five years. This is to discourage flip artists and developers so that families are not placed in competition with them. Further, the exclusion is phased out by $1.00 for every dollar that a taxpayer’s adjusted gross income exceeds $500,000 ($250,000 for single filers).
What chance do we have for both houses to finish their work before Thanksgiving and actually put a single piece of joint legislation on Mr. Trump’s desk before Christmas? First, it would be a miracle if it is done that fast. Second, every special interest in town is loading their weapons and pulling the triggers to energize their constituency in order to put pressure on their legislators to modify any part of the bill that affects their special interest. The problem is that Washington is full of special interests, from A to Z. Third, I have no doubt that the Tea Party will step into the political mix when they calculate the increases to the debt through these tax changes, which currently is swirling around $1.2 trillion dollars over ten years. Frankly, that would be a huge improvement in the rate of debt we are currently incurring, but may not meet the requirements of the tea party and its constituency. They have enough votes to cause serious problems and probable death to this legislation if they are able to unify their votes into one solid voting bloc. We shall see.
It’s not so important that this be identified as a Trump legislative success as much as how this will affect all of us. We are the ones stuck with the final product and all of us need to better understand what the provisions of the bill are, and express our thoughts to our elected officials. We live in the most vibrant democracy in the world, and I encourage everyone to get involved in the biggest reform of the federal tax code since 1988.