The issues with direct impact to our tax returns are:
- Repeal of the State & Local (SALT) Deduction
- Property Tax Deduction Limit at $10K
- Mortgage Interest Deduction - capped at property values of $500k
- Repeal of Personal Exemptions
- Doubling of Standard Deduction
This brings us to our taxable income. The change in the tax brackets put another wrench into the computation. Where we previously would have been in the 28% bracket, we could potentially be in either the 24% or 25% bracket, depending on whose rate passes (between House or Senate) or some agreed upon number. So the reduction in tax rate is helpful. What will really determine the end result is what the tax table will determine as the subtraction factor.
What do I mean? If you make over $100k, there is a multiplier and then a subtraction. So for example, if you make $100k (married filing jointly), your tax is $21,037 [($100,000 x 28%) - $6,963]. The subtraction factor is the $6,963.
If there are no changes to the subtraction factor, then our resulting tax liability could be in the ballpark of what the liability is previous to tax reform. If they make some changes to this subtraction factor, then there could be potential for greater or lesser tax due. So the impact of tax reform to my personal tax return could be minimal FOR NOW, but annoying all the same. There is plenty of potential future impact, especially in the purchase of a new home (mortgage interest, property tax) or even just borrowing against my equity, not to mention the tuition expenses that I'll have later in life for my children (potentially non-deductible now - but my hope is for tax reform again in the future to reverse this if it pushes through now).
For many others, it could be a bigger headache and a much bigger impact.
Take heed! This is only for the Federal income tax portion of the tax puzzle. We have yet to see how the states react to any Federal tax reform. If they conform to the Internal Revenue Code (IRC) or not will determine impact to our SALT liabilities. Remember, the Federal government could potentially take away from each State's own revenue. This could potentially be another detriment or benefit depending on which way each local government responds to the changes.
If you haven't already read up on it, I suggest you do. And I also advise speaking to your Tax Accountant and/or Financial Adviser to discuss your impact. Here's a few articles to read in the meantime:
- OPINION: Tax Cuts And Jobs Act - Detrimental to the Middle Class
- How your tax bracket could change under Trump's tax plan, in two charts
- Macro-Market Research: Federal Tax Reform Has Significant Implications for State and Local Government Finances