The Tax Bill: What Matters Most for Taxpayers

Posted by Brad McMillan, CFA, CAIA, MAI

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

and tagged In the News

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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.

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