by Brian P. Murphy on 2017-11-01 8:28am
Amidst the string of storms battering the southeastern U.S., the biggest blast yet may be brewing just up the coastline in Washington, D.C. as the GOP-controlled Congress turns its attention from dismantling the ACA to reforming the tax code. Even with complete control of the federal government relegating the Democrats to beleaguered bystanders, the tax proposal being crafted by the GOP is by no means a "gimme." The splits within the party, often based on geography as much as philosophy, show that very few facets have the support of the full party.
A quick look into the major targets being discussed reveal the stark contrast in viewpoints currently dividing those supposedly on the same side. Because specifics on the plan are scarce, we'll focus just on the biggest options currently attracting the most attention in the debate, many of which have been the "sacred cows" of tax breaks in the past.
One of the sharpest differences apparent in the early phases of the tax debate centers on individual taxpayer's retirement savings. There are proposals that would limit or alter the amount that can be placed into 401(k)s pretax to allow for fewer tax dollars deferred and more government tax dollars collected now. Numbers that have been bandied about include changing the cap, currently around $18,000 for most people, down as low as $2,400, but that is still a completely open debate.
While the president has tweeted "NO change to your 401(k)," leaders within his party are not necessarily falling into line. Prominent members of the party, including the House Ways and Means Chair, the House Budget Chair, and the Senate Finance Committee Chair all have stated that changes to 401(k)s are not off the table. One Arizona Republican rep has gone so far as to say that the president should leave the budget writing to Congress.
One battle looming has had the first salvos already fired between Republicans in low-tax states and Republicans elected from high tax states over deduction of state and local taxes (SALT). Representatives from higher taxed states are concerned that their constituents are losing tax benefits if the SALT deduction is reduced or removed. The ability to deduct SALT in higher taxed states has helped taxpayers in those states defray some of their tax bills. Republican lawmakers from New York and New Jersey, both high tax states, have announced that they are unlikely to support the current proposals if elimination of the SALT deduction is included.
One New York rep has proposed having taxpayers choose between deducting their local property taxes or their mortgage interest. Another option offered was to make SALT a tax credit instead of a deduction.
Mortgage Interest Deduction
Current tax law allows homeowners to deduct mortgage interest paid on homes owned valuing up to $1 million, which can include both a primary residence and a second home. Interest paid on up to $100,000 in home equity loans can be deducted as well (unless the individual is subject to the Alternative Minimum Tax). Mortgage interest is one of the largest deductions available to the average taxpayer.
Another option under consideration is a revisit of a proposal made in 2014 that would lower the cap from $1 million to $500,000.
One interest group that is not happy with this alternative is the real estate industry, where there is deep concern that such a drop in mortgage interest deductions would be throwing cold water on a real estate market that is finally heating up following the 2007-2008 crash. The real estate profession has the same concern over losing the property tax deduction.
Property Tax Deduction
The proposal, as much as is known, also seeks to eliminate most itemized deductions and encourage people to stick with the standard deduction. The property tax deduction is one of those that it is anticipated would be eliminated if this approach is adopted. The standard deduction would be doubled as an incentive to stick with it and skip itemizing, although combined with elimination of the personal deduction, the change in the standard deduction is projected to be closer to a 20% gain for the individual taxpayer, rather than a 100% increase.
The majority of those who do itemize are in the higher income brackets beginning with $75,000 annual income and up, although there are those with lower income who benefit from itemizing.
Additional help for families here may come from an increase in the child tax credit.
Eliminate Estate Tax
The one tenet that is likely to receive broad support within the party is repeal of the federal estate tax, in spite of the fact only a very small segment of the taxpaying population will be affected. To be subject to the estate tax, an estate must be worth at least $5.49 million for an individual and $10.98 million for a married couple. Even with these high thresholds, half of these estates pay no taxes because of other deductions that are available to them.
The Tax Policy Center estimates that more than 11,000 estates will have to file a return, but just under half of those will owe any federal tax, and the higher rate applies only to amounts above the $5.49 million individual/$10.98 million per couple threshold. The number of family farms projected to be affected by this range from 80 to 160 according to policy experts.
Other Taxes and Deductions under the Microscope
These are merely the largest, most notable components currently on the public radar. Much more is likely to happen before a final proposal reaches the House or Senate floor. Meanwhile, the cows are being rounded up and the selective slaughter of the sacred is under way. Other potential targets for change include:
Workplace health insurance premiums
Real estate taxes
Keep your eyes on the cows and beware the bull!