July 16, 2018
July 16, 2018
On September 27, 2017, President Donald Trump proposed sweeping income tax reform. If enacted as presented, it will be one of the biggest changes in the US tax code in history. There are provisions in the proposal that also specifically affect housing and homeowners.
What are the main changes proposed, and how will the Trump tax proposal affect homeowners?
The Trump Tax Proposal seeks to simplify the tax code, by increasing the standard deduction, decreasing or eliminating certain itemized deductions, and implementing fewer tax brackets.
The Standard Deduction and Personal Exemptions. The Trump tax proposal starts by roughly doubling the standard deduction. It will go from the current $6,350 for single filers, up to $12,000. For married filing jointly, it will increase from the current $12,700, to $24,000.
However, the proposal eliminates personal exemptions, which are currently $4,050 per person. Under current tax law, a family of four will have the benefit of a $12,700 standard deduction, plus $16,200 for four personal exemptions, for a total of $28,900. Under the Trump plan, they will receive a flat standard deduction of $24,000 only.
By contrast, a married couple with no children would benefit from the Trump proposal. Under current law, they would get the $12,700 standard deduction, plus $8,100 for two personal exemptions, for a total of $20,800. Under the President’s plan, they will get $24,000.
Under the President’s plan, this imbalance will be partially offset by increasing the income threshold to receive the child tax credit of $1,000 per child.
Itemized Deductions. Most will be eliminated. The itemized deductions that will survive include home mortgage interest and charitable contributions. But the current deduction for state income and sales tax would disappear. This will be especially difficult for people who live in states with high levels of income tax.
Death and Estate Taxes. These are repealed under Trump’s plan.
The Alternative Minimum Tax (AMT). This will also be repealed under Trump’s plan.
These are the basic proposals of the Trump tax plan. The plan has been submitted to both the House and Senate, each of which is preparing its own version based on the Trump framework.
The current tax code has seven different tax brackets, ranging from 10% up to 39.6%. Under the Trump proposal, there will be just three tax brackets – 12%, 25%, and 35%.
The tax brackets will look like this:
The House version of the bill will add a fourth bracket, at 39.6% (which is also the current maximum tax rate), which will be effective on incomes exceeding $500,000.
There are two significant changes here, and exactly how they will play out will depend upon changes in the House and Senate versions of the bill.
The two current changes most affecting homeownership include:
With regard to the mortgage interest deduction, it appears that this will not affect current homeowners. The reduction in mortgage indebtedness interest to $500,000 will apply to new homeowners only.
What the proposed changes do more than anything else is modify current levels of deductions for real estate taxes and mortgage interest. But neither deduction is entirely eliminated.
Should the proposal go through and become law, the biggest negative effect will be on the upper end of the housing market. This will include homes that sell at price levels requiring mortgages in excess of $500,000. But it will also include homeowners who live in states and communities that have high property tax levels. Homeowners in high taxes states, such as California, New York, and New Jersey, could be pinched by the reduction in the real estate tax deduction.
As for the mortgage interest deduction limit, this won’t be a total loss for higher-end buyers either. They would still be able to deduct mortgage interest on loans of up to $500,000. That means that if you take a $600,000 loan to purchase an $800,000 home, you’d only lose the deduction on the $100,000 of excess mortgage indebtedness.
For certain segments of the housing market, the Trump tax proposal looks mostly negative. But that doesn’t mean that it will play out as currently proposed.
There are two possible scenarios that could change the outcome completely:
Given that the real estate industry is such a large part of the US economy, and has plenty of allies in both industry and politics, changes in the proposal are likely. The various tax proposals are only now being submitted and debated. As they move forward, the pressure will be heavy from industry groups to retain something very similar to the current mortgage interest and property tax deductions.