The Independent Market Observer

The Tax Bill: What Matters Most for Taxpayers

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Dec 5, 2017 1:38:15 PM

and tagged In the News

Leave a comment

tax billYesterday, I spent some time talking with my accountant, Dave, about the implications of the new tax bill as we understand it so far. The discussion focused on planning charitable giving, but I found the context of the pending tax bill to be illuminating beyond that. He made some excellent points about what really matters to most taxpayers that I thought were worth sharing. So, here we go. (Thanks, Dave!)

State and local tax (SALT) deduction

This deduction is either eliminated or limited to $10,000. What does this mean? People who pay high state taxes or property taxes will be taxed on income they have already paid out. For example, I have to write a large check to the state and the town and then treat that income—for federal tax purposes—as if it were sitting in my bank account.

This matters to taxpayers in states in the Northeast, Illinois, and California. In these areas, property values, property taxes, and state income taxes are high. It has much less of an effect in states with lower property values (which is most of them) and lower tax levels (also most of them).

Politically, there are Republican House members who will be affected, but there are few Republican senators from these states. The political costs, to the Republicans, will probably be manageable. So, expect to see this happen.

Mortgage interest deduction limits

In a similar vein, by limiting the amount of mortgage interest that can be deducted, states with high property values (i.e., the same list as above) will be disproportionately affected. Mortgages above the limit will become more expensive on an after-tax basis. Worse, property values for homes above that limit will also take a hit, as buyers are less able to afford them. Again, this is likely to happen, as the political impact for Republicans is manageable.

Higher standard deduction

This is the good news. Since the standard deduction will rise substantially, most people will be able to exclude more income from taxation. The question is whether this will offset the damage from the previous two points. For many people, it will. But for higher-income people in the high-property value/high-tax states, it may not.

Itemized deductions

The three items above are fairly well known. But there is another issue that comes into play at that point: the number of people who will take itemized deductions, as opposed to the standard deduction. The standard deduction would rise substantially, and the major deductions for most people (SALT and mortgage interest) would be dialed back. As such, it is entirely possible that many will simply not find it tax efficient to itemize—losing many other deductions, particularly for charitable donations. With no tax advantage, charity may lose some of its appeal.

Unintended consequences

The one universal law is that of unintended consequences. I suspect the effects on charitable donations will be one of the first for the new tax law, but there will certainly be others. Not least, it will change the discussion around taxation in the high-tax states as taxpayers realize the impact of the double hit.

Your tax bill

While the specifics on any final bill are up in the air, these are the things to watch for many readers, especially in the areas I mention. The bill could well end up being a tax cut for many—but certainly not all. Keep an eye on how SALT and mortgage deductions are treated, as that may have the most impact on your own tax bill.

Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®