Here are the key points from the now passed Trump administration’s tax plan for 2018 and beyond.
After reviewing the key points, I share my thoughts on how to win under this possibly new tax environment. The audio version is at the end of the post.
Republican Tax Plan Highlights
* No change to existing rules on 401k retirement accounts and the ability to contribute the current $18,000 into the accounts tax-free, and $18,500 for 2018 and beyond.
* Lowers the deduction for mortgage interest for new home loans of $7500,000 or less from the current $1,000,000 cap. Old loans up to $1,000,000 are grandfathered in.
* Limits the deductibility of local property taxes and state income taxes to only $10,000.
* Lowers the top marginal tax rate from 39.6% to 37%.
* The long-term capital gains and qualified dividend thresholds will remain as they are under the current system e.g. those in the bottom two tax brackets are eligible for 0% capital gains and dividend tax rates, those in the middle get a 15% tax rate, and those in the top pay a 20% tax rate.
* No repeal of the 3.8% Medicare surtax on net investment income over $200,000 per person.
* Individuals making over $500,000 and couples earning over $1 million may still pay 39.6 percent
* Reduce the corporate tax rate from 35 percent to 21 percent.
* Doubles the estate tax limit to $11M for individuals, and $22M for married couples.
* Increase child tax credit from $1,000 to $2,000.
* Nearly double the standard deduction used by most average Americans to $12,000 for individuals and $24,000 for families
How To Win Under The New Republican Tax Plan
1) Continue to max out your 401k. There’s no reason not to take advantage of tax-deferred investment growth and potential company matching / profit sharing.
2) Reduce real estate exposure in the most expensive cities. Slashing mortgage interest deductibility on debt down to $500,000 from $1,000,000 may put downward pressure on homes priced above $625,000. $625,000 is the cut off because most people put down at most 20% and borrow the rest (80% X $625,000 = $500,000).
The real estate segment that will likely come under the most pressure are those homes priced above $1,250,000 and up until about $3,000,000. In this price range, taking out a $1,000,000 or higher mortgage debt is quite common. After $3,000,000, the percentage of buyers who pay cash increases, and the segment will therefore be less affected. However, if there is weakness at lower price points, it will ultimately drag down higher price points.
Areas such as San Francisco, San Jose, Oakland, Manhattan, Brooklyn, Stamford, Los Angeles, San Diego, Washington D.C., Seattle, Boston, may experience weakness at the margin.
Related: Why I’m Investing In The Heartland Of America
3) Move out of states with high property tax rates. Limiting the property tax deductibility to $10,000 will hurt homeowners who live in high property tax states or who own expensive property or both. Residents of California, New Jersey, New York, and less so Illinois should look to move or sell their property and rent. Although Utah, Wyoming, Arkansas, Alabama, West Virginia, and Louisiana have high property tax rates, real estate in most parts of those states are relatively inexpensive. Hawaii has the lowest property tax rate, but also one of the highest real estate prices.
4) Move out of states with high state income tax rates. Consider relocating to one of the seven states with no state income tax: Washington, Nevada, Wyoming, South Dakota, Texas, Florida, or Alaska. No longer being able to deduct state income taxes will hurt states like New York, DC, Iowa, Minnesota, and New Jersey the most because life is hard in the states with high tax rates and brutal winters. At least in California, residents can play outside year around. But make no mistake, California residents lose under the new proposal.
If you make between $75,000 – $100,000, $100,000 – $200,000, $200,000 – $500,000, and $500,000 – $1,000,000, the average tax increases are $873, $1,500, $2,800, and $8,555, respectively according to the Urban Institute & Brookings Institution.
5) Get married and make up to $600,000 combined, or stay single if you both are making over $500,000. The current top tax rate is now 37% for individuals making more than ~$500,000 and married couples making more than $600,000. It would be absolutely nonsensical for two $500,000 singles to get married. If you can make a combined $600,000 as a married couple to pay a 35% marginal tax rate, then go for it.
Related: The Average Net Worth For The Above Average Married Couple
6) Start a S-Corp to earn pass through income. If the top tax rate for businesses with pass-through income declines to 25%, you’re basically winning if you have operating profits of over $92,000 per individual or $153,000 per married couple because those are the cutoff amounts for a 25% marginal income tax rate.
If you don’t have a business idea, then consider switching from full-time employee to consultant and having your old employer pay you a higher rate as a business. They might oblige since they don’t have to pay you any benefits.
If you aren’t willing to start a business or become an independent contractor, then consider investing in businesses that will benefit from the corporate tax cut to 20%. And if you don’t know what company to invest in, then you can simply buy an S&P 500 index fund.
Related: The 10 Best Reasons To Start An Online Business
7) Step on the gas when it comes to building wealth, or die before Trump leaves office. Doubling the death tax to $11M per individual and $22M per couple should motivate you hoard as much wealth and die before Trump leaves office. As soon as you start thinking about how your wealth can be used to help others, then there’s endless upside.
Related: The Benefits Of A Revocable Living Trust
States that hurt the most from State and Local Tax (SALT) deduction elimination
8) Enjoy being a middle class American. Reducing the $1 million mortgage indebtedness to $750K, raising the child tax credit to $2,000 from $1,000, limiting the deductibility of property tax and state income tax to to $10,000, and eliminating the death tax doesn’t affect the middle class.
But what does help the middle class is almost doubling the standard deduction, whether you have a property or not, to $12,000 for individuals and $24,000 for families. Roughly 70.4% of taxpayers claimed the standard deduction on their tax return, therefore, most Americans will benefit from the increase. Of those who do itemize their deductions, the average claim for 2014 was $27,447 according to the IRS. Therefore, there is a convergence and a simplification of the tax code.
A $24,000 standard deduction for married couples equates to paying a 2.4% interest rate on a $1,000,000 mortgage. Hence, the increase in standard deduction takes some of the sting out of the potential halving of the mortgage interest deduction to $500,000. That said, property in higher cost areas should still feel downward pressure at the margin because mortgage interest is only one of several itemized items for deduction.
Related: We’re All Middle Class Citizens
Try To Avoid Getting Stuck In The Upper Middle
The GOP tax proposal is telling everybody not to get stuck in the upper middle like garbage in a trash compactor. You either want to make less than $200,000 as an individual or less than $260,000 as a married couple or more than $500,000 as an individual or as close to $600,000 as a married couple. Everything else will either be neutral or slightly negative. The real frustration is the cost of living for most high income W2 wage earners.
As for me, I plan to generate as much business profits as possible until the next administration arrives. If the business pass through tax rate does get capped at 25%, I will use my tax savings to hire someone to help run the business and write content so I can spend more time with my family. Readers win because I won’t end up quitting under the strain of full-time parenthood for the next five years. The economy wins because one more person gets a job and spends.
I’ve already sold a very expensive property in San Francisco to lock in gains, simplify life, and diversify into heartland real estate. If the mortgage indebtedness cap for interest deduction does decline to $500,000, I will pay down my principal mortgage debt to $500,000 if previous mortgages above the threshold are not grandfathered. Finally, I plan to leave San Francisco and move to Honolulu where the property tax rate is 70% lower within the next three years.
Hopefully by the time tax rates rise again, I’ll be completely sick of making money and want to relax. As a retiree, you want high tax rates so that other people can pay for your benefits. In a low tax rate, bull market environment, it’s best to press as much as possible.
Readers, how do you feel about the latest GOP tax proposal? Will you do anything to take advantage? What are some tax reform issues I’ve missed?
Mr. Freaky Frugal says
Sam – Thanks for the nice analysis!
I’m impacted very little by the GOP plan. I have no mortgage, so I use the Standard Deduction anyway. With the old plan, Mrs. FF and I get $21,700 between the Standard Deduction and Personal Exemptions. With the new plan, Mrs. FF and I get $24,000 and no exemptions. A slight improvement.
My tax bracket decrease slightly from 15% to 12% because we’re FIREd and have low taxable income. Another slight improvement, but I could use the extra headroom in the 12% tax bracket to do larger Roth IRA Conversions.
KS says
My family of 4 will be seriously screwed under this tax plan if it passes. I’m “upper middle” living in NJ with high property taxes. The highest federal tax rate we pay will go from 33% to 35%. I will lose the SALT deduction and lose more than half of my property tax deduction. And let’s not forget that healthcare premiums will now be taxed if you work for a company that offers benefits. My paycheck from day one goes down. The only good things about the plan are the death of AMT and the possibility that my wife’s income as an independent contractor will be taxed lower. But there is very little detail about who qualifies for that. But the losses will far exceed those two possible outcomes.
Basically, “tax reform” is being paid for by 6-7 states. It’s a big FU to blue states and I’m an Independent!
Elizabeth says
It sounds like you actually may benefit more than you realize. I am an “upper mid” earner and also assumed I’d lose out under this plan due to my tax bracket increasing from 33% to 35%, losing a big sales tax deduction and some of my property tax deduction. But I ran the numbers through my tax spreadsheet, and I’ll actually save a couple grand in taxes (1-2% of my total federal tax bill) due to so much more of our income being taxed at the new lower 12/25% rates. On top of that, if the AMT goes away I could save another $5K. Not to mention benefits from economic activity increasing if corporate taxes get slashed, which should benefit my stock portfolio.
It pains me to see the media and many individuals talking out of both sides of their mouths on this issue, simultaneously claiming that Trump’s plan only benefits the rich but then griping that it’s skewed to hurt “high tax states.” The “losers” under this plan are high earners with tons of deductions, regardless of what state you live in. But those “rich people” are also getting the benefits of the elimination of AMT and estate taxes, along with being shareholders set to be some of the few who will benefit from the corporate tax rate decrease (to hear the media tell it).
The pros and cons actually seem remarkably balanced to me – actual reform, not just a tax cut, requires special interest deductions to be cut. Everyone wants to close “loopholes” until it actually comes down to it.
Financial Samurai says
I agree with your thinking. There’s so much political rhetoric in the media, they are so biased/sensational to get more views. But when I look at who benefits through this article, it seems like most people benefit, and there is a simplification of the tax code which everybody will benefit from.
The people who lose are those who are receiving other benefits that will be taken away to pay for this tax proposal. And of course the high income earners in states like California, New Jersey, New York, and Illinois.
KS says
My very talented tax accountant disagrees with you. Anyone who thinks the corporate tax cut will benefit employees is naive. They will buy back more stock, increase dividends and only invest in ways to increase automation.
Financial Samurai says
Then the solution is to simply invest in those companies that are publicly traded. As the hundred percent owner of my small business, I will not be buying back even more stock because I own all the stock.
America is mostly run by Small Businesses. And I will be hiring more help if there is a pass-through tax cut.
Do you run a small business?
KS says
My comment was to Elizabeth. But to answer you Sam, no I don’t run a small business. I agree with you that the high tax states lose but making $200k – $400k in NY doesn’t mean you’re wealthy. Those are the tax payers paying for this “reform” and my tax accountant agrees.
Elizabeth says
My point was that as a shareholder I stand to benefit from the corporate tax cuts – not as an employee. Most high earners who may otherwise be losing should be in the same boat unless they aren’t investing. I agree that companies are likely to use much of their tax savings to boost profits and reinvest, but since I plow quite a bit of my income into broad US index funds I stand to benefit from resulting increased dividends and share appreciation. Most literature does indicate that the general economy should benefit too, especially at first if offshore cash floods back to the US – to what degree is what is debatable.
I agree that high earners aren’t necessarily wealthy (yet), but I disagree that the “coastal blue states” are the losers here. There are high earners paying plenty of state, property and sales tax in red middle America too, and plenty of low/middle earners in NY and CA.
Randy says
I run a small business. I won’t be hiring more if my corporate taxes are cut. (Sidenote, my profession is expressly excluded from the cut in passthrough tax rates so it’s not relevant). But I employ all I need to employ to maximize profits, if my rates went down I would just make more.
Jim Bob says
KS, those in the other forty three or so states applaud the reduction of their subsidizing the federal budget for the benefit of you folks in wealthier states who’ve been paying less than your fair share for decades. And don’t forget that about 88% of the cost of the s-a-l-t tax increase, net of the standard deduction increase, is paid by the rich. The liberals love socking it to the rich, as long as they’re in conservative, poorer states.
KS says
I see you’re drunk on talking points. Red states are far more dependent on the federal government than blue states. Who’s paying their fair share?
Jim Bob says
KS, your “talking point” about federal expenditures ignores the fact that military bases are more efficient for training in warmer climates. Remove said expenditures from your calculation and red state versus blue state spending is more balanced. Some can discuss policies without name calling; others can’t.
Handy with a Calculator says
If you ignorantly look at only one set of data, yes, states with no state income tax pay more to the fed gov’t than those states where you can deduct for income tax. However, you also need to look at how much the fed gives back to those states to see if a state is a net contributor or a net drain. Small details like that. Big TX, for example, is a taker state. As of 2014, for every dollar to the fed, TX got approximately $1.50 back. At least those fine folks are getting a great ROI for their tax dollars, but they’re a net drain. It’s also intellectually lazy to assume that the split is red/blue. KS is a donor state. For every dollar they send to the fed, they get approximately $0.75 back. Meaning that those fine folks are TRULY paying more than their fair share. Deep blue Cali, NJ, NY, and IL are all donor states, as are deep red NE and MN, getting less federal money back than they give in.
CC says
MN is deep red?
FullTimeFinance says
I suspect it’ll change ten more times before anything gets signed. That being said as written it will work to our advantage or be neutral. Our mortgage is approaching payoff so our itemization was creeping close to the standard deduction(low income tax state). My biggest concern is charities might also suffer if less people itemize due to loss of charitable deduction value at lower incomes.
Niel says
Great for you!
How about for a new professional family making 300,000k per year (for the first year ever), wanting to buy a house, with 300,000k in student loans – or, every single physician fellow in America next year.
No student loan interest deduction
MID cut in half
No deductions for state taxes
This is a HUGE FU to professional couples just coming out of school and looking to start a life.
Stewart says
Your income will be too high to deduct any student interest under the current tax plan. You may want to calculate again under both scenarios. The tax savings on the lower income will offset some or most of the deductions lost.
BT says
He will still likely come out behind.
Dan Meyers says
I personally would recommend paying off the 300k in student loans. I think a good start would be reading “Dave Ramsey’s : Total Money Makeover”. This could help a lot with figuring out how to pay off that debt. I only make 50K a year and I managed to pay off $52k in student loans in 2 years. Still have about 27k to go, but just a recommendation on how to fix your mountain of debt. I don’t think anyone with that much debt should be buying a house…Or even getting lunch at applebee’s.
christine says
Student loan debt is a perfect example of the private sector “fixing” something lol– what a SHAM.. And I’m an educator– truly disgraceful
Khadijah says
Professionals coming out of school and looking to start a life benefit from lower taxes in the lower band of their income, (zero taxes for the first 12k for individuals or 24k for couples), coupled with higher standard deductions that really benefit renters who in the current tax system do not make enough or own property to deduct mortgage interest and prop taxes, many people who don’t own homes have the ability to do itemized deductions. This tax savings should allow for young professionals to save more money for home buying and retirement.
Nirav Desai says
So renters in expensive cities can now afford their rent increases, right? :-P
Dynx says
Niel,
The state income tax may burn but in the grand scheme of physician compensation you’re allready shooting yourself in the foot working in an area with high state income tax if that’s the case.
Bad news for you is there isn’t any student loan interest benefit to you at your income anyway, so I wouldn’t get to riled up because somebody long ago allready sent that FU your way.
Don’t buy a million dollar house. not a good idea anyway.
If you’re in cali, NY, NJ etc think about who is really screwing you. The state grabbing their X% of your income or the federal gov saying you have to pay the same for federal services as every other person in the nation making the same amount as you.
Stewart says
Well said
Apathy Ends says
I am curious to see how this shakes out for us, it should benefit us but MN has a high income tax rate that might make it a neutral event.
We are close to maxing out our 401ks and should be able to make it happen next year – that seems to be the easiest way to reduce the impact (thankfully they didn’t gut the 401k max)
Shouldn’t be much of a real estate impact, not a lot of 500k plus houses in the suburbs of MN I imagine we will see a lot of 499-560k final sales
Dads Dollars Debts says
It will be interesting to see how tax code changes will effect early retirees. Will we aim for different earning levels? Sell real estate? ….who knows. It has been a very long time since substantial changes have been made to the tax bill.
Alex says
Hi Sam! Tennessee actually repealed its Hall Tax this year. It’s being phased out over the next few years (4% in 2017, ten decreasing 1% per year until 0)
Thanks for the great article as always!
Chi says
Definitely starting a finance consulting business, already in the works and planning to make this my full time job to take advantage of the lower tax bracket
Financial Samurai says
So many consulting businesses will pop up I’d pass through rate gets reduced. But I’m sure they will require consulting business owners to pay a higher percentage of their profits in terms of salary versus distribution.
Heraclitus says
One negative thing for me about the House bill is that it, according to a Forbes Blog, will require me to pay FICA taxes of 15.3% on passive real estate income. This is new, and very bad for small real estate investors.
Syed says
Nice breakdown of the proposal. More than likely things will change if/when it gets approved, but it’s good to know where things stand. I’m glad the 401k contribution limit is untouched for now. I’ve been hearing some stories (fake news?) that the limit would be slashed considerably. If that happened, there will be a lot of poor Americans in the future.
While middle and low income families aren’t negatively effected all that much, the group that stands to do the best are very rich business owners. Slashing the corporate tax rate and eliminating the estate tax have been on the Republicans radar for a long time.
Peter says
One other proposed change that is not getting much attention is the phase out of the capital gains exclusion on home sales ($250K single, $500K married) for those with incomes over those levels. At this point I’m not sure if the profit from the home sale would count as income. If it does it will surely affect our planned retirement downsizing in 2019. I agree with KS who commented that ‘tax reform’ is being paid for by 6 or 7 states.
Lily @ The Frugal Gene says
We’re in the upper middle hovering just around $260K-$280K. It would be a very close call where we land. We live in Washington so there’s no income tax. This state has high property and auto tax. We dont own a car. Our property is a business expense so we get to deduct mortgage interest, so that doesn’t effect us. Doubling the standard deduction is good for us (and most Americans).
We save money (most people will) under the new plan but it will be a hit to the deficit.
Damn Millennial says
Sam,
Do you plan to keep your other SF real estate when you move to Hawaii? Would you buy a home or rent when you do move? Interesting considerations I think the big take away (if anything gets changed at all) is the mortgage interest deduction. Those living in expensive homes with large mortgages could get dinged.
Jim Bob says
DM, “those living in expensive homes with large mortgages” account for about 6% of taxpayers.
Damn Millennial says
Hi Jim Bob,
Agreed but they are also most likely high earners to qualify for those mortgages and therefore bring in a disproportionate amount of revenue for the government each year to make those payments. As opposed to the large majority who pay nothing in federal taxes.
Financial Samurai says
If and when we go to Hawaii, we plan to buy our Island dream house where we can live for the next 18 years and raise our son.
The one thing I have enjoyed the most about accumulating wealth is buying a fantastic primary residence to enjoy life and create great memories in.
And then after he becomes an adult, we can probably downsize to a two bedroom condominium somewhere.
Damn Millennial says
I agree I think it is a huge pro to get to enjoy a home on the journey. Buying a home these days for your primary use gets shunned a lot but it is a great feeling.
Would you keep your current residence in SF as a rental or sell and use the proceeds for the Island dream house?
You will truly be living the dream raising your child in HI. I hope he gets into surfing that would be the ultimate to leave school and go hit the ocean in the afternoon.
Financial Samurai says
I plan to keep my current SF primary residence as a rental or a second home for friends and relatives to use. I will always have something in SF b/c it’s my favorite city in the world.
Related: Why I Wanted To Build A Real Estate Empire
Damn Millennial says
Sounds like a great plan to me, hard to beat that combo.
Nerd Abroad says
Good to see at least an attempt to simplify and reduce taxes in the US, which should attract investment capital and be stimulatory to the economy. Even if the companies which benefit just buy back more shares, that returns capital to shareholders who will find other uses for the money. That can still be stimulative to the economy as they spend it, lend it, or re-invest in companies with more growth potential. Lower corporate tax rates will incentive would-be business owners to take on the risk.
In Canada our federal and provincial governments are taking the opposite approach, in recent years adding new high income brackets with higher tax rates, and recently introduced changes to small business taxation that will stifle investment and economic activity. I expect the US to outperform and Canada to underperform in relative terms. I’m seriously considering a move south!
Michael @ Financially Alert says
Thanks for the thorough breakdown, Sam. It’ll certainly be interesting to see if or how much of it goes through. I was surprised to see the mortgage deductions cut so much, and the doubling of the standard deduction. I guess it’ll simplify things overall. Sucks to be stuck in the upper-middle class bracket!
Rudiger says
Don’t forget the “hidden” 46% tax bracket! If you make more than $1 million in taxable income, there’s an extra 6 percent tax on the next $207,000.
This is to claw back the $12,420 in tax savings from the difference between the 12% tax rate and the 39.6% tax rate on the first $45,000 in taxable income.
I wonder why no one is talking about this. It’s yet more incentive not to work too hard.
Dynx says
I’d be interested to see who the 1 million dollar salaries are and how they structure their income.
Those I know would be hit would be high paying medicine specialists, lawyers and executives.
In those setting generally you have a lot of pull in how you get paid. Deferred compensation deals or structures with stock compensation and such.
Don’t feel to bad for the million + earners. I’m not there yet but even my pay structure has an option for deferred compensation. They’ll find a way to avoid it.
AAB says
As an investor in stocks bringing the corporate tax rate down is good. Purely from an investor perspective. Everyone else who doesn’t own stocks though is screwed cause the lowering of the rate comes at their expense. The same with everyone that doesn’t own a small business. The same with everyone that doesn’t have a massive estate. A lot of readers of this site should be excited about this plan. It gives them even more.
K-man says
I agree. Wealthier members of society benefit a disproportionately large amount through a number of channels such as the elimination of the estate tax, potential reduction in highest income tax bracket or starting it at a higher dollar amount, and the reduction in the corporate tax rate (since the wealthiest people own a disproportionately large percentage of capital assets like stocks and bonds).
Most other people will notice a minimal impact in the short-run, but it’s important to keep in mind that the government will have to make up the lost tax revenues somewhere. Either future tax rates will have to be increased, significant additional changes to the tax plan will need to be made, or run at a large deficit for a while until someone decides to take action. The plan in its current form has to be altered.
AAB says
I do think a form of this tax plan will go through. They won’t alter it much more. Most of Congress is rich and will allow it through.
Agreed, someone in future will need to fix it. There will be an economy bump, followed by a hard crash. The best that I can do is watch for the signs of the hard crash after the continued run up. Believe that Very high interest rates and consumer prices are also in our future.
Alice says
I really don’t see why people think a marriage penalty for the upper middle is a good idea. To make it even worse, it actually goes away for the very wealthy. I’m telling my kids who work in tech not to get married. And with two working people in a marriage, you also have two commuting costs, two work clothes expenses, plus potentially daycare and other items. Several of my married working friends need two houses or an additional apartment because of the distance between their jobs. Those GOP leaders really want to keep women out of STEM or other high income but salaried professions. It is too bad for our future generations.
Financial Samurai says
I think you read their proposal wrong. The GOP tax plan is raising the marriage income limit to $1 million from $470,000 combined income when the 39.6% marginal income tax rate kicks in.
This eliminates the marriage penalty tax For single people who want to get married who make over $470,000 combined. Please reread section #5 where I Give an example.
CCJ says
Sam,
The marriage income penalty goes away for people making above 400,000. But the 35% tax bracket for married couples starts at 260,000 while the 35% tax bracket for individuals starts at 200,000.. If those individuals weren’t married but made 200,000 each, they would be in the 25% tax bracket. The cost of getting married for those individuals could be $14,000 per year.
Nirav Desai says
Yup, a two-income household where the HHI is between $260k-$400k gets unfairly penalized. This is basically a large portion of dual income households in CA and NY. Very well-off, but not wealthy…what I presume is the upper middle class.
As usual, when politicians says we need to raise taxes on the rich, they mean the upper middle class.
Financial Samurai says
Hence, got to shoot for the $1 million total income for married couples to get a better deal.
May couples with little children never rest and chase the almighty dollar for years to come.
fileseperate says
I’m looking into filing married separately.. and giving the child deduction and property tax deduction to my lower income wife.. I’m taking the mortgage interest deduction… I think we come out ahead doing this vs. filing jointly. We would definitely come out ahead if she could take the standard deduction and I just itemized everything including our child.. but that won’t work do to tax rules.
Beth says
The marriage penalty is sexist and is anti-marriage / anti-family. We aren’t in the days where the wife stayed at home and didn’t get an education…. thank God!
Financial Samurai says
I cannot agree more. Just because you aren’t being penalized, doesn’t mean it’s right to penalize other married couples will earn a higher amount.
I hope people can realize equality no matter where you are or who you are.
Jim Bob says
Alice, the claim that “GOP leaders really want to keep women out of STEM or other high income but salaried professions” is ridiculous. Who told you that, and what proof did they offer? When Ms. Devos advocates “Promoting Science, Technology, Engineering, and Math (STEM) Education, With a Particular Focus on Computer Science,” do you think she’s biased against women?
BUMPASAURUS REX says
WAIT WAIT WAIT.. your response to all of this is somehow the GOP are SPECIFICALLY targeting women to NOT go into STEM, etc? You don’t think maybe your being a tad… dramatic? I get it that Sams blog tends to attract people in bluer states, but can we put down the Bernie Koolaid for a bit and look at this tax plan subjectively? Some of the proposals are good, simplified tax code, lower corporate tax rates (which in theory should attract more foreign investment), etc.
Matt Spillar @ Spills Spot says
Thanks for the in-depth breakdown Sam, I’m interested to see how this all plays out. Doubling the standard deduction seems like great news for the middle class, and the stat saying 70% of Americans claim the standard deduction is important. Much higher than I expected, but it makes sense.
Ten Bucks a Week says
I think Texas would be a good place to be if it passes. I’m going to try to live on that limit of $500,000 mortgage, but even then the standard deduction is so high.
Thanks for the analysis, so many articles just gave a few bullets. Also, lowest rate is 10% currently.
Stewart says
I live in Texas (Fort Worth) and we have very high property taxes around 2.7%. This should be interesting to see how home prices above $625k are affected. If you live in a decent neighborhood near town with good schools you are going to be capped at the $10k deduction. Unless you give lots of money to charity, most people are going to switch to the standard deduction. A rural low cost area of Texas would be the ideal place to move to.
Financial Samurai says
It’s just seems so crazy about how high your property tax rates are. But, given there is no state income tax, it makes sense. Do you think the best thing to do is make $500,000 as an individual and rent in TX?
Jon says
Some things to point out that you’re missing:
– For pass through entities, it is only passive income that is earning the 25% and professionals that are actually earning money for labor (accountants, lawyers, financial professionals and other “consultants”) will still be taxed at ordinary income levels. There is a blended 30/70% split between capital/labor designation for people that can prove that they invested capital into a business. My read is that this looks pretty good for Realtyshares investments! Less so for people that were just trying to arb the game. I’ve actually read that people may look to convert to C-Corps as a result.
– Mortgages originated before 11/2 are grand-fathered into the higher balance ($1,000,000 for couples). Also the new law removed home equity and 2nd homes from deductibility. Also, you need to live in a home 5/8 years to claim no taxes on capital gains upon sale. This is going to lock people into their homes and make mobility even worse, exacerbating the inventory problem. I’m not sure if you’re actually going to see the weakness that you suggest as people don’t want to give up their deductible mortgages.
– The best any homeowner in CA, NJ, CT can hope for is to break even under this plan. It is the most obvious wealth transfer from blue states to red. It is almost laughable when anyone says this is a middle class tax cut when 3/4 of the benefit accrues directly to corporations.
Beth says
Ok I could be wrong but my understanding is in an S-Corp, the owner must pay him/herself a reasonable wage. That wage is taxed at ordinary income. The remaining profit passes through to the owner and is currently 100% taxed at the owners personal tax rate (which also includes retained earnings – money left in business at the end of the year), but with Trumps tax plan profit will be taxed at 25%. So with paying the owner a wage this makes sense to me.
Jim Bob says
Jon, the “wealth transfer from blue states to red” would need to last for how long to offset the current transfer the other way, which has been in place for how many decades? What’s laughable is that you don’t mention that the corporate taxes are about 12% of the total revenue.
Financial Samurai says
I don’t think it’s bad at all to require someone to live in their house for five years out of eight years. The longer people can hold onto their houses, the higher the wealth accumulation in my opinion. Transaction costs are a killer.
People should try and hold onto their houses as long as possible until they can’t take it anymore.
BD Mike says
Thanks for the summary, Sam.
On your questions:
– We relocated from New York City to Chicago in 2015. While still not cheap, Chicago is less expensive than a number of the coastal cities in the US. We pay less for a 2/2 rental in a nicer building & location in Chicago than in New York.
– As IL has the second highest property taxes in the US (and one of the most messed up budgets/deficits IMO), we’re quite content remaining renters for the time being. We also don’t know where we’ll end up longer term. So the changes in the mortgage interest rate deduction are neutral to us at the moment.
– We typically take the standard deduction (one of the ~70% of tax payers you referenced), so doubling the standard deduction would be beneficial, as we’re currently in the 28% bracket for a portion of our income. We’d be comfortably within the 25% bracket with plenty of room to spare as our income (hopefully) grows. Would be happy to see marriage penalty and AMT go away as well.
– To your point, we’d likely fall in the “sweet” spot – especially in a state with a lower income tax rate.
– Regardless of the outcome of this plan (or any others) and whatever any potential future administration will bring, we’ll stay the course of the basics: maxing out pre-tax accounts, focusing on additional sources of income, and – very likely – consider incorporating at some point in the future.
BD Mike
Ken says
Any news on whether or not capital gains and qualified dividends will still be taxed at $0 like it is now for the 15% bracket?
Financial Samurai says
The rules stay the same under the new proposal.
Radhika Miriyala says
Sam, I know they say there are doubling the standard deduction but are removing personal exemptions for all. So if you are a family of there previously you would get the standard deduction and 4500*3 which was the personal exemption. But not you will loose these 4500* exemption so the standard deduction doubling is not really doubling.
We are in CA dual high income but not much higher than the 500 so we are going to seen an increase. Our mortgage is 7/1 if they do decrease mortgage deduction to upto 500k we will starting paying more towards mortgage every month so we are at ot less than 500 loan amount in 6 years when we need to refinance.
Mike H says
Too bad this doesn’t include striking down the 3.8% net investment income tax on any passive or interest income made on a household over $250K. I guess that is under the Obamacare repeal discussion which is still not yet resolved.
Thanks for the detailed analysis!
-Mike
CuriousOne says
I dont get it.
It is important to know the sources of taxes, before one can analyze if this is any good. IRS gets 47% from individual income tax, 34% from payroll tax (remember pass-thru entities pay additional payroll taxes to pay themselves), 9% corporate (the much touted decrease from 35 to 20% as effective rate was never 35% to begin with), and 9% from excise/estate etc. [2016 figures]
Also know that US median income is ~53K. Top 50% of US taxpayers pay 97.25% of the total tax collected, and bottom 50% (below the median income) pay 2.75% of total income tax collected.
Thoughts:
1. Why not just make a law that whoever makes less than $50K/year is tax free. Just file a 3 line postcard. Whats the point in collecting that 2.75% of total collections from these families?
2. Now, for the ones who make above $50K, why not slab them with increasing pain as their income goes up? Right now, I can understand $45K * 2 = $90K for married, $500K * 2 = $1M for married, but why not $200K * 2 = $400K for married, but instead $260K?
Shifting the pain from million income couple to upper middle class is downright cheating, besides letting them bear the most of marriage-penalty for the nation. Upper middle class may not mind paying for the slabs below theirs, but to finance the couples above $1M is downright stealing, esp. because such folks are in their 40-50s with college going kids, and earning this much only because they do not live in Alabama.
3. Pass through Entities (LLC, S-Corp) make up for 95% of all businesses – independent contractors, A grade students who became accountants, doctors, software/management consultants, lawyers(umm) – the professionals; and the mom-n-pop shops. Now these A grade students are being penalized, because they cannot take this 25% rate. The reason that a lot of professionals are now moving in to buy Subway Franchise instead. But C-Corps get to pay 20%? Again, the same logic of $1M couple vs. $300K couple is same as C-Corp vs. LLC? Screw the LLC, screw the $300K couple and let it pay for $50 Billion C-Corp, and $1M Couple?
This country only encourages C graders just like Robert K (from Rich Dad Poor Dad) claimed.
F this.
Mike H says
Read the details. Couples over $1.2 M aren’t getting a special break and will need to pay a 6% surcharge tax (bringing their total marginal tax rate up to 45.6%) for about $200K of income, this is to pay for the lower tax rate in the lower bracket, so their effective tax rate goes up to 39.6% once this is completely paid. It seems pretty fair.
-Mike
Financial Samurai says
The good thing about “A grade folks” is that they have the smarts to take action to adjust to their environment.
To clarify, are you saying the Mom n Pop are the “A grade folks” too? They are the drivers of employment.
Mike H says
I’d expect the premium paid on muni’s vs non tax advantaged bond income to go up in the high state income taxes, such as CA. A good chance to resell some established positions into the secondary market.
-Mike
Financial Samurai says
Can you elaborate on why? And if premiums go up, isn’t it better to buy more before premiums go up?
Mike H says
I need to check the pricing but would expect the premiums to start to increase by now. If not, buy now long dated munis and resell into the strength. The tax code will likely change again with a new administration.
This situation doesn’t effect me since I live overseas and don’t pay state income tax, only federal with the overseas discussion. Actually it is slightly favorable but would be better if and when the net investment income tax is nullified.
If I were in the USA and had enough business / consulting income, I’d be looking at setting up a C corp and moving to a lower tax state but suitable location, like Lake Tahoe, NV. Lower taxes and a generous use of deductions, baby.
-Mike
The Professor says
Nice analysis overall. Not much mention on how it might affect head of household tax payers. For HOH, they will lose the personal exemption for each person and the standard deduction really doesn’t double since it was at $9,350 already. The child tax credit does increase $600 but that doesn’t quite offset the loss of the personal exemption.
I guess it depends on how many kids you have as to how much that will affect a family.
Well just have to wait for all the details to get ironed out.
Craig K says
Hi Sam,
Just a quick question. I know that the plan shows the 25% rate kicks in at $90k. The way it’s being marketed is that the first $24k is tax-free (but I think that’s just the standard deduction). So, it seems to me that the actual brackets (with respect to taxable income, not just AGI) are:
$0 – $66k at 12%
$66k – $260k at 25% (or does it actually start at $236k?)
$260k+ at 35%
So, the calculation (before considering any credits) would be:
$250k AGI minus $24k Standard Deduction = $236k Taxable Income
$66k at 12% = $7,920 (because the “first” $24k is “tax free” … aka standard deduction).
$170k at 25% = $42,500
Total tax before credits = $50,420.
The reason I ask is, a lot of the “calculators” out there assume $90k in taxable income is at 12% but, I don’ think that’s accurate – i.e. $90k at 12%, plus $146k at 25% = $47,300.
A difference of $3,120 is nothing to sneeze at.
Thoughts?
Ten Factorial Rocks says
Sam, Great summary. Are you sure about the positive impact of corporate tax rate cut on S&P 500? From my calculation, they pay an effective tax rate of about 21% (when earnings weighted across sectors) already, so if the rate declines to 20% with no special deductions, there isn’t much of an improvement. Also, with the great bull run we’ve had this year, I wonder if much of the tax reform has baked in already.
Financial Samurai says
Not sure. But think about it this way. If corporations pay an effective tax rate based on your calculations of 21% when the statutory corporate tax rate is 35%, what do you think the effective tax rate will be for corporations if the statutory corporate tax rate declines to 20%? My bet is lower.
I don’t think the stock market as fully baked in such a cut. But we shall see. Nothing is certain.
Jeff says
Sam,
>>6) ..declines to 25%, … $92,000 per individual or $153,000 per married couple because those are the cutoff amounts for a 25% marginal income tax rate.
Can you elaborate on how this would work? For example, let’s say I make $454,000 year as a married small business owner. I put $54,000 in my SEP, so I’m taxed on $400,000. With this new tax proposal, are you saying I can state my “income” as $153,000 then only pay 25% tax on the remaining “pass-through” of $247,000 (instead of the current top rate of ~35%)?
multimillionaire says
In fact, I have planned on moving out of CA and to TX upon my retirement even before this tax bill proposal. The state income tax in CA is unacceptably high. CA, like other blue states, likes to redistribute wealth.
multimillionaire says
It is very unclear to me how switching to becoming a contractor or consultant from employee would dave on income taxes. Whether you receive your income in the form of w2 or 1099, the net income still eventually adds to your AGI. However, the contractor has more leeways to deduct his/her expenses, since the expenses would not be subjected to 2% floor before they can be deducted.
Regarding contributing to solo 401K or other IRAs, please don’t forget that one may also has to pay employment taxes on the income as well. Hence, the tax benefit of contributing to pre-tax solo 401K plan would be reduced. On that, one has to consult his/her tax accountant.
Steve says
The loss of personal exemptions will cause some pain for large middle class families. While the child tax credit may have been increased in the new plan, it only temporarily shields the larger families from pain of losing the personal exemptions when the credit runs out (the year the child turns 17). So you may have dependent children up until the age of 24 if they are going to college, but those last 7 years will be without tax credits (-$1600 credit) and minus the $4050 personal exemption. Additionally, personal exemptions may include qualifying relatives – maybe older people in your household who make next to nothing – the personal exemption for each of those folks also disappears. People taking care of a parent or aunt or uncle…lose out. Sure, the plan advocates are trying to entice some buy-in with the temporary $300 credit for adults which is only guaranteed for 5 years, but why isn’t everything in the new plan only guaranteed for 5 years, subject to renewal? This credit can easily disappear and the comparison versus today’s existing tax plan will not be favorable at all. Increasing the bottom tax tier by 20% (from 10% to 12%) is surprising. At this time in our history after years of hyperinflation in college costs that forced many to borrow, is this the time to punish graduates by getting rid of the up to $2500 deduction? Sure, let’s also kick the really sick folks when they are down with the elimination of medical expense deductions. If they are spending more than 10% towards medical bills, then they surely can afford to lose the deduction. Yes, the standard deduction amounts go up, but it is mostly, if not entirely, offset by loss of personal exemptions and the elimination of major categories of itemized expenses. At least those cuts help with the elimination of AMT, estate taxes, reducing upper rates, lowering corporate rates, allowing for lower tax pass through income… It is a middle class miracle after all!
Heezay says
If I understand the Tax Reform correctly it looks like rental property income is now subject to self-employee taxes? Wondering if anyone else here has seen this? This would definitely be a negative against doing rental property.
Steve CPA says
That is incorrect. Rental property income is not subject to self-employment taxes.
Sphynxy says
I usually agree with you but this post is rather biased. If this were a Democrat squeezing the affluent upper middle class, you would be crying treason. I’m in a family with 2 high incomes living in New York City, where we pay 13% in state + local tax. We don’t have the option to simply move somewhere else, like you are suggesting. Why should my family (and many other families with much lower income) subsidize billionaires and corporations who do not invest in their people?
Ken says
@Sphynxy – Of course you have the option to move as anyone does, but you have chosen not to move. We’ve lived in many states in the country and chose to move to new states every few years. We’re now in a state with no income tax (TX) when previously we were in expensive Denver.
Financial Samurai says
Is the tax plan biased or my article biased? Why not take some of my other suggestions to heart and do something about the situation?
I live in California. Re-read the article and look at the tax rates. Either take some action or just pay more. What is the point of saying life is not fair?
Here’s a good exercise: what would you suggest someone in your shoes do? Write it out and help other people in your situation.
Jake says
I think you are overestimating the intelligence of people who make high W2 incomes. They may have the academic backgrounds and the pedegree, but they are conditioned to be robots in a factory.
Sphynxy says
For the record, Jake, I don’t have an academic background. I’m a hustler from birth, which is why I’m not going to sit and be thankful that I get to be part of the select few people who get a significant tax increase from this proposal (we paid over 80k in SALT last year).
Recovering Engineer says
The tax plan is clearly biased but as you said, that’s kind of the point. Repealing SALT is a way for Republicans to stick it to the blue states they know will never vote for them. I think to Sphynxy’s point, most of your “How to win” suggestions aren’t really actionable.
1 is doable
2 is possible but in many cases if you live in a high price real estate area there is only so much you can do to limit your exposure to that
3 and 4 are both “move,” which is not practical in many cases. The people most likely to be hurt by this are ones who own expensive property, make good money but are still wage earners, and have kids. It isn’t so easy to just pick up and move. If you work in NYC your choices are NJ or CT which are just as expensive. There are many jobs that are limited to high COL regions and don’t let you telecommute.
5 is great in theory but not actionable. Sure if I could up my income to $999,999 tomorrow I would.
6 is simply wrong based on the legislation as proposed, this option won’t qualify you for the pass-through tax rate.
7 see “5” above, great in theory but this was true both before and after the legislation.
8 is basically a direct contradiction of the rest of the advice though it is arguably the most reasonable piece of advice other than contribute to a 401k.
If I could take my job, move it to a state with no income tax, increase my income to $999,999, buy a house with a $499,000 mortgage and $10,000 in property taxes I would do it in a heartbeat. Unfortunately that isn’t realistic so instead I’ll put down a larger down-payment on my house, be glad that killing AMT will make up for a chunk of the lost deductions and hope this sneaks through Congress with the carried interest still intact.
Sphynxy says
Thanks, Recovering Engineer.
What is bothering me about this post is that you are basically saying that we should suck it up and pay more or move. This is not realistic for the vast majority of us, especially if you are born and raised in this area (as I am), have extended family here, small children, schools, etc.
Sucking it up and paying more is obviously the only realistic option. But now I realize that even tax increases have a political bias and I will be sure to note this when I vote in future elections. It was not Obama or a Democrat who raised taxes on my family.
Jake says
I thought it was obvious the Republicans want to cut taxes to spur economic growth, and Democrats want to increase taxes to redistribute the wealth? I honestly thought everybody in America knew this, except for if you are a recent immigrant. Are you?
Recovering Engineer says
I can’t tell if this is sarcasm or not but that’s exactly his point. The Republicans have claimed for decades to be the small government/lower taxes party. Now that we have a Republican controlled House, Senate, and White House they are raising our taxes and increasing redistribution. They sold out their ideals to placate the current noisy populists and in an attempt to win over Democrats who will never vote with them in the first place.
Jim Bob says
Sphynxy, perhaps you’re not aware of: Obamacare Individual Mandate Excise Tax; Obamacare Employer Mandate Tax; Obamacare Surtax on Investment Income; Obamacare Excise Tax on Comprehensive Health Insurance Plans; Obamacare Hike in Medicare Payroll Tax; Obamacare Medicine Cabinet Tax; Obamacare HSA Withdrawal Tax Hike; Obamacare Flexible Spending Account Cap – aka “Special Needs Kids Tax”; Obamacare Tax on Medical Device Manufacturers; and a dozen more Obama tax increases.
Dynx says
Sphynxy:
You pay 80k in state and local taxes. And you claim it wasn’t a democrat that raised your taxes. Just wondering what party is running the show in your state collecting that 80k to begin with?
Maria says
NJ had a republican governor for 8 years and a few before that. It does not matter which party it is. Both are after upper middle class. If you live in NJ and voted republican all your life, this so called tax cut is really offensive.
Rob says
Incomes for software developers in other states is about half. I feel kind of like I should stay given that
Joe says
It looks like we’d win with this proposal. The only downside is that we won’t be able to deduct the local income tax. Other than that, it looks good for us.
The capital gain tax in particular would be a nice boon to the lower two brackets.
This looks better than I thought.
Brad - MaximizeYourMoney.com says
What isn’t clear to me is the mortgage interest deduction.
Is it limited to $500k? So if I have a $750k mortgage, I can deduct 2/3 of the interest paid?
Or, what it reads like to me, does it mean that someone with a $750k mortgage can’t deduct anything at all because they’re over the $500k limit?
Seems the 1st option is most fair, but in my reading most articles imply the 2nd to be the current recommendation.
Rob says
No you can deduct the 500k because otherwise that would be insane.
BT says
You would deduct the pro-rata portion under the threshold. That’s how it works now with the $1,000,000 threshold. The Bill merely amends the $1,000,000 figure and replaces it with $500,000
Bill says
I guess I would be one of the lucky ones who would benefit the most from this proposal.
I don’t have a mortgage so I don’t lose that deduction. I live in a no income tax state so no worries there. I’m married so that helps. I own a S-Corp so any pass through would benefit me as well. My property taxes are under the 10k threshold so no penalty for that. I have a high income so any reduction in rates helps. I’m bumping up to the current estate tax threshold so elimination of the death tax would benefit me as well.
I estimate the tax plan as currently written would save me between 50 to 70k per year in taxes. I would use that extra money to hire an IT person for my business. I may be a greedy republican but I do believe the best way for me to help the country is to provide jobs for people who don’t have one.
Half the country would say I don’t need a tax cut. I just ask them to consider, the reason I would get such a large break is because I currently pay a very large amount of taxes in both dollar and percentage of income amounts.
Doesn’t it make sense to give the biggest break to the people who pay the the most?
Grant @ Life Prep Couple says
We will benefit greatly from this plan should it go through as written. Tax rate decrease from 33 to 25%. We have always gone with a standard deduction so that going from $12,000 to $24,000 puts a massive smile on my face.
Not a business owner (yet) but I work for one. Seeing the corporate tax rate drop to 20% is amazing.
It looks like almost everyone will benefit from this yet the media makes it sound like it is just tax cuts for the rich. I don’t see how anyone (liberal/conservative) could have much problem with this.
Oh I hope this goes through for 2018. I will eager to do my taxes.
Rob says
Great to hear positive thoughts. What state do you live in?
Grant @ LifePrepCouple says
Sorry, NC.
SeattleGuy says
Sam, don’t married couples making more than ~$470k but less than ~$1M benefit by dropping from a 39.6% tax rate to a 35% tax rate? Your article indicated you want to be as close to $1M as possible to benefit.
Are you simply saying skirting under the $1M a year mark is better than skirting just over it? In that case I agree with you. Anytime you are on the bubble of the income cutoff you lose money by being just slightly over the hump (old or new tax plans).
Thanks
Financial Samurai says
Yes.
Grant @ Life Prep Couple says
Isn’t it only the income you earn after a certain threshold that gets taxed at the higher rate? Say you are single and make $210,000 my understanding is you only pay 35% tax on the $10,000 not the whole $210,000.
If not then you would have to make $230,000 just to break even after taxes with what you would have had making $199,999. That can’t be right.
Physician on FIRE says
Also, don’t get caught in the 45.6% bracket that functionally exists for income in the range of $1 Million to $1.2 Million (singles) or $1.614 Million (married).
That wouldn’t be the worst problem to have, but it’s the worst place for your taxable income to fall, tax-wise.
Source: kitces.com/blog/tax-cuts-and-jobs-act-2018-house-gop-tax-reform-proposal/
Cheers!
-PoF
Jim Powell says
Sam the man! Awesome post with a lot of info here.
I have a friend who recently cashed out of the NYC market, after buying in 10 years ago at 1M and selling last month for 1.8. He’s getting out of dodge too. Since my mortgage is paid off, and my main expense is the taxes/co-op fee, I’m going to stay put for now, but I am minimizing my income by sitting on the sidelines during these stagnant wages. It just doesn’t make sense for me at 50, when you factor in the commute and the office BS. Some of your points reminded me of another article I recently read about how driverless cars could expand the horizon for commutes, pushing it about another hour out. (based on current drive times) I’m like you. I like to zig when others zag, or as Gretzky famously said….”skate where the puck is GOING to be!” Thanks for taking the time to put this together.
Tess says
Jim I have to agree. I always like Sam’s blog. its thought provoking and makes me do my homework. I wish I had read it years ago. I might have found a rich man to marry, be 500k better off, and gotten a face lift. He’s always entertaining. Thanks Sam!
Financial Samurai says
Haha hilarious.
I wish I read my site back in 2001. Alas, there is no rewind button in finances or in life.
But there seems to be obvious off-the-wall moves to make in the present to secure ones financial future. But I think most people don’t give a crap.
Tess says
I think its never too late to work on ones financial future, within reason. Just like you always stress trying to de-stress there is a happy medium. My main stresses come from “most people don’t give a crap.” so true. and their actions whether its extended family ….Ex’s, steps, your own kids ex’s and steps…influence our decisions. suddenly there’s a town hall meeting in your head on how to help yourself without hurting others. The TED on your blog today was good. but its so hard to do in your 60’s. Do you go for safety? or strike out like I do and take lots of falls (literally I have MS)…fortunately the younger me was used to falls so the older me just lets go and meets the ground. Gives a great perspective on what to clean next. that dust bunny under the couch. in finances, the bit monster freezes me. I gotta get over the fear. your a lot of help. Try superoxide dismutase and glutathione peroxidase, catalase for your back when you over do it. works for me!
DeForest says
Great article!
Rob says
I live in SF and plan to buy a home in 2018. I’m not totally sure what this will do to real estate prices but I’m a bit concerned with the tax rate hike. I’m making over 200k Atm so it might make sense to create an S Corp and funnel all income though that entity. What about real estate income? Regular income taxes are taxed at the highest rate but from what I understand, real estate income is favored heavily. I could buy a duplex in NC or PA. Also aiming for a smaller place or splitting the loan amongst two income earners might work. I need to talk to a tax guy.
Financial Samurai says
The biggest question you want to really delve deep into is whether buying SF real estate in 2018 is a good idea. I’d write a post looking at both sides if I were you.
Rob says
What a great idea.
BT says
Hi Rob — please be CERTAIN to speak to a tax guy. The proposed rules on pass-through income are complicated and specifically exclude professional services firms from the reduced rate. The rules go on to say the rule is intended to benefit capital intensive businesses. That being said, these rules are the default position. Time will tell, but our firm may take the position that even professional services firm have a capital component in order to secure the 25% rate.
Rob says
A change in strategy is definitely needed in this situation. “Capital Intensive” doesn’t really mean much to me, I suppose companies that are capital intensive are ones that already have enough money to pay 0% in taxes as it stands. They may be aiming for “small businesses”.
Regular income is just not favored. Perhaps, buying real estate and getting paid through capital appreciation is the way to go especially since 1031 exchanges can still be used for investment properties. Referring to the proposed 500k limit on the Real Estate Interest deduction, I wonder whether you can split the loan 50/50 satisfying the limit among two income earners in the household…
Tess says
trying to wrap my head around this from different family dynamics. After all, a lot of us 60 and older are trying to help all generations in one family and everyone is not equal in income. I loaned my son who is head of household for his family of 2 a small mortgage. He pays me every month at 4% on that mortgage. I have a major disability, so lots of medical expenses, and don’t work that 4% is my safety net. My small home has no mortgage so no interest to deduct but I live in Georgia and have property taxes. We were planning in moving into one home so I would be better able to help him with child care and he could help me with keeping house. this really throws a kink into it. Should I restructure the loan to principle no interest for 5 years? and we should keep two residences? How is this going to work for multi-generational families?
Mark says
There is no state income tax in Tennessee.
There was a state tax on dividend income above a certain threshold. As another commentator mentioned: that dividend tax had been repealed.
Jim Bob says
The Tax Policy Center is a liberal group with usually flawed models. It looks like the SALT tax increases don’t include the offsets from the standard deduction increase and bracket decreases. There’s also no category for < $1000.
Scott Conger says
I was unaware that Trump wrote the tax code. I always thought it was Congress. Whether or not he’s in office in 3 years means nothing to the tax code or it’s writers as far as I can discern. With regards to the most expensive counties voting for Clinton, why do you suppose there is a correlation between high taxation and liberal leaning communities? Usually they are Utopia and I wonder why anyone would want to leave?
Here in WY, we love our low taxes, our God, our neighbors, and the things that have kept us free. It’s a terrible place for someone used to living in CA or NY. I doubt that they could stand all the freedom. For those that do eventually make the move, I say “Welcome to America”.
Love your Blog…keep it coming! Just please don’t encourage anyone to come to my low tax state…we like it just the way it is.
Financial Samurai says
I hear he wrote every single word of the tax reform legislation.
How did you know my next post was about everybody investing in Wyoming real estate?
Going to single-handedly raise prices for all Wyomingingings.
https://www.financialsamurai.com/develop-sphere-of-influence-financial-independence/
Biglaw Investor says
“* Eliminates the deduction for state income taxes”
I’m not sure you’re right about this Sam. There’s talk in legal circles that the language only eliminates the deduction for state and local income taxes for employees but not for business owners that derive their income through pass-through entities.
There might be a loophole for high income business owners after all …
Kandice @ Out of Pocket Finance says
I’d just add a word of caution regarding “switching” to independent contractor status and the comment about employers no longer having to pay benefits. It’s not that easy. There are decades of case law and Treasury rulings regarding the difference between an employee and independent contractor. There’s a 20 factor test, based entirely on a facts and circumstances analysis. (Revenue Ruling 87-41, IIRC.) The IRS has demonstrated renewed interested in this issue, especially since it launched an employment tax related research project (read, collecting data so they can target better on audit and collect penalties). Do a google search for the Microsoft case for insight into the distinction and how it affects benefits. My point being, it’s not like flipping a light switch.
Financial Samurai says
It’s a good warning. But everybody has the right to start their own consulting firm. Not everybody has the right to get hired or make a large enough income that would benefit from lower tax rates.
FIRECracker says
Wow, very thorough analysis, Sam!
“Finally, I plan to leave San Francisco and move to Honolulu where the property tax rate is 70% lower within the next three years.”
Can I come visit? :)
KS says
I just read that you won’t be able to deduct interest on a newly refinanced mortgage of your primary residence under the new tax reform plan. If true, it will decimate the refi industry and make people choose between keeping the deduction on a higher interest loan or refinancing to get a lower rate. You can’t have both. Anyone else see anything on this?
Financial Samurai says
People in the higher end real estate markets should be worried. It is obvious the administration is going after the higher and markets to redistribute the wealth.
KS says
From what I understand, it’s not just the higher end that’s impacted by this. It’s all refinancings going forward.
Michael says
No, from what I understand it’s only for newly purchased homes. All of the articles I’ve read mention that it won’t affect refinancings over 500K
K-man says
Overall, isn’t it more of a redistribution to the wealthy? If we do end up with significantly lower corporate tax rates, this will disproportionately benefit wealthy individuals who control most of the capital markets.
Also, I can’t imagine many people needing to refi over the next decade since rates presumably won’t drop much from where they are.
Jen says
Sam, Thanks for the write up.
Suggestion…on your chart for tax rates, others say Taxable Income, yours says income. (most work off AGI).
This basically hurts families that already itemized.
This hits families with older teenagers. 18 and up will get no child tax credit yet most 18 year olds are in their senior year, still at home. Also, most college kids are still dependents yet will not get the personal exemption anymore. The personal exemption loss is a huge hit to our family because we already itemized. Thus additional income of $33K (personal exemp and prop tax) will be taxed giving us an additional $5.1K tax increase for a “Republican” tax cut. ‘Upper’ middle income is barely getting by in Southern California with this.
Seems crazy toddlers get a 1600 tax credit and 18 year olds get 0. Means it’s a child care deduction and nothing to do with the costs of raising kids.
What was the purpose of allowing state and property taxes deductions in the first place? Was it to prevent double taxation? Why allow some now yet not others? Why not combine the 10K limit for both? Curious your thoughts?
Financial Samurai says
Not sure why kids get tax credits anyway, since not everybody can have kids, and having kids is an individual choice. I don’t mind if an 18 year old adult’s parent’s doesn’t get a tax credit.
Maybe the state income and property tax deductions were the Federal Government’s attempt to try and equalize the cost of living in America since some states have higher taxes and cost of living than others? The government is all about social engineering.
Ryan Farber says
The question no one ever seems to ask is “why are my taxes going up” or “why are my taxes going down?”
If you make more after taxes great, but is this at the expense of healthcare coverage (bad) or because we are making cuts to military expenditures (good). If you are paying more in taxes are you getting more for your money, government administration expenses (bad) or reduction in pollution due to more restrictions and health & safety checks (good).
From a high level though, the Republican plan, the people who used to be deficit hawks, are now willing to hand out $1.5tril in tax cuts to mostly wealthy people with no expectation that it will ever be paid back. Talk about shady business. We can do better than this.
K-man says
Completely agree! Too often people look at the plan and are fully supportive of it if their own taxes are going down this year, and they’re against it if their taxes go up. There’s far too little concern for the overall tax revenues being collected and what the government plans to spend the money on.
They could give the poor a 0.1% tax cut, the wealthy a massive tax cut, run up the federal deficit, and everyone would still be happy because their taxes go down in the short-run. Unfortunately, the current administration understand this better than the general public.
ALR says
Wonderful, thoughtful analysis. Thank you
Gary says
I just wanted to say I love this article. You point out those most likely to win and lose but the key take away is identifying the new opportunities. As a homeowner in NJ with 2 kids and relatively high SALT we (my wife and I) may be a losers most years if we did nothing. We do have choices (she has W2 income and so do I as an owner/employee for LLC taxed as C Corp) and we will develop a plan for shifting income/expenses between 2017/2018 if/when a tax bill actually looks likely to pass (If I had to wager it won’t or will be drastically different/watered down). That notwithstanding it’s hard to stress enough the benefit to the upper middle class of doing away with the AMT. In some of our better years (bigger bonuses, higher passive income, or severance pay for instance) we already effectively lost our SALT deductions because we got crushed by the AMT.
Although I am programmed to seek ways in which to take advantage of the current tax system my preference is for some form of simplification that would reduce the number of deductions in return for lower tax rates across the board as I would much rather spend my time enjoying the income I keep rather than having to devise different ways to keep it (just to keep up with everyone else). Talk about inefficiency. In my personal economic view I also favor a reduction in the marginal tax rate we all pay as I do think it incentivizes people, on average, to work harder for that extra dollar if it means they can keep more of it. I’m not saying we need to cut taxes overall but if overall taxes collected were estimated to be the same but you could at the same time reduce the average marginal rate in order to achieve it by limiting deductions… I see it as a obvious benefit to society if not the economy.
Based on others comments its clear there is much political debate as to whether high tax states are being subsidized by the federal government. I think both sides of that debate have good arguments. Without going into detail as my comment is already long enough I would just add that if I have learned anything about statistics in my dozen years of working in corporate America it is that I can twist numbers to tell whatever story you need me to tell. Through that lens it softens the narrative / talking points on both sides.
Lady Butterfly says
Thanks for breaking down the new tax code for us. Great analysis.
The marriage penalty is one of the reasons why my partner and I choose to stay single. Under the current tax rates, we are in the 28% bracket instead of the 33% bracket. Under the proposed tax rates, we would of move from 25%(single) to 35%(married). We own separate smaller homes instead of one big home so we still can deduct up to a million combined mortgage interest and deduct $20K combined property tax. We will benefit from the increase child tax credit and lower capital gain and dividend taxes. We will hurt equally, single or married, from not being able to deduct our CA state taxes.
sumit says
Sam – thanks for a wonderful analysis. Curious what’s your take (and of any other readers) on the impact on the investment property buying in the bay area? I have been in the market for an investment property in the SF (since my primary home mortgage is on a really low rate, I have ability to make a significant down payment, and I am feeling confident about career etc) . Now I’m wondering if that’s still a good idea if the mortgage interest deduction for 2nd home is going to get completely eliminated. Would that have a net downward impact on prices in SF / surrounding areas?
Appreciate any thoughts – happy thanksgiving!
Edna Gonzalez says
I just came across your page today. My husband and I have no write off on our taxes. We are mortgage free and make roughly 200K a year. At this point, we would love to save about 150K to buy another home and keep our current home. But if we keep our income without making high contributions to 401ks it will take us a long time, we aren’t young, 52 and 53. We would like to buy our second home in about 2 years? Any advice? We are definitely novices when it comes to all the financial jargon, any advice along the lines of “Financial Advice for Dummies” would be apprciated.
John Rogers says
Despite what we hear on the media this plan leaves in place the high capital gains tax, surcharge and the upper bracket. It’s the middle class and poor who get the most benefit since they get a little more from a double standard deduction with the personal exemption phased out and pay lower taxes since the rates because of higher thresholds for each bracket.
The corporate rate will help everyone because everyone directly or indirectly is pretty much invested in stocks through mutual funds or what not. But where it really helps is for small business owners and also it promotes more businesses to be in the U.S. the thing atrump needs to do is to communicate to the public that there is no excuse for companies to ship jobs to Mexico and china now that we will have a lower corporate tax rate and say he wants to see more manufacturing done in the U.S. Companies don’t have a leg to stand on if they claim they can’t compete here with lower taxes negating any higher labor costs.
snowcanyon says
Utah has low property taxes. We will be screwed by the new tax law, but not based on a .68% property tax. Where are you getting your info?
Big Grubby Bool says
Hmmmm , but bottom line less taxes will be collected . Less taxes means less revenues which mean higher deficits. They are counting on a boom b/c of this ?My feeling is surpluses in taxes paying debt down causes the boom.I guess we will never know b/c congress will make this deficit happen. 36 yrs of this shit so far.
Prabhat says
Hi Sam,
Since the tax bill is pending President’s signature, any thoughts on prepaying 2018 property taxes? We stay in the bay area where annual property tax bills are ~20K or more.
Any thought around 2017 year end tax strategies would also be appreciated.
Financial Samurai says
You might as well try. But, they say it’s not gonna work.