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Republican Tax Plan Faces Hurdles as Mortgage Interest, SALT Deductions Weigh

Republican Tax Plan Faces Hurdles as Mortgage Interest, SALT Deductions Weigh
Rep. Kevin Brady, the Republican chairman of the House Ways and Means Committee, and Speaker of the House Paul Ryan, right. (AP)

By    |   Friday, 03 November 2017 10:52 AM

House Republicans on Thursday released the Tax Cuts and Jobs Act, setting the stage for public debates on a bill that some analysts see dead on arrival.

The most contentious proposals are changes to the mortgage interest deduction that will affect people who live in areas where property values are higher than the national average, like New York, Silicon Valley, Los Angeles and most major cities. Also, removing the deduction for state and local taxes could hurt residents of high-tax states.

Seth Carpenter, chief U.S. economist at Swiss, maintained his view that the tax legislation will not reach President Donald Trump’s desk for approval this year. Reform may get passed next year with a slightly higher corporate rate than the proposed 20 percent that’s now in the bill.

"By adding in a lot of other cuts, that just adds to the cost of the tax cut," Carpenter told CNBC. "Everybody loves tax cuts. It's the paying for it that's painful."

Peter Boockvar, chief market analyst with Lindsey Group, also is skeptical of the cut to the corporate tax rate from its current level of 35 percent — although most companies take advantage of special deductions and other goodies to lower their effective marginal tax rate to 18.6 percent, according to estimates from the Congressional Budget Office.

"Now the lobbying begins, and that 20 percent tax rate could turn into 25. That would make a lot of people unhappy," Boockvar said.

The House Ways & Means Committee, the tax-writing committee, is scheduled to begin a multi-day “markup” of the tax bill on Monday, November 6. The panel's members will have a chance to make changes before voting to send the bill to the floor.

Ahead of the markup, Chairman Kevin Brady (R-Texas) will prepare a revised bill that could include changes negotiated with members outside the committee that would smooth the bill's passage. More revisions could be made after committee passage but before the bill is brought to the floor. House Speaker Paul D. Ryan (R-Wisconsin) said he wants the legislation through the House by Thanksgiving.

The Senate, meanwhile, will launch a parallel process in the coming weeks, led by the Senate Finance Committee. The two chambers hope to resolve any differences and pass a final bill before year's end, The Washington Post reported.

The following changes are part of the Republican bill:

Individual Taxes

The plan will cut the number of income tax brackets from the current seven to four, with the highest rate maintained at 39.6 percent. The Republican proposal would raise the income level for that top bracket to $1 million from $480,500 for a married couple filing jointly. That means every dollar earned over $1 million would be hit with that rate.

A 12 percent rate would apply to individuals earning up to $45,000 and married couples earning up to $90,000. A 25 percent rate could apply to up to $200,000 for individuals and $260,000 for couples. A 35 percent rate would apply until $500,000 for individuals and up to $1 million for couples. A 39.6 percent rate would apply above $500,000 for individuals and above $1 million for couples. For reasons explained below, most individuals earning $12,000 or below and $24,000 for couples will pay zero because of the doubling of the standard deduction.

Whether individuals or households will pay more or less will depend on a wide variety of factors, including whether they take the standard deduction, which reduces taxable income by a fixed amount, or they take targeted tax deductions, like subtracting mortgage interest or state and local taxes.

Most Americans are likely to see a small reduction in taxes under the plan. At the same time, many Americans will pay more, particularly those who do not take the standard deduction.

Standard Deduction

The House Republican plan proposes to almost double the standard deduction while getting rid of the $4,050-per-household-member personal exemption, which could mean large families might not see a net benefit.

Under current law, a married couple with two children who files jointly and takes the $12,700 standard deduction would not pay tax on their first $28,900 of income. Under the GOP plan, the same family would be eligible only for the higher $24,000 standard deduction. As long as its total income is less than $230,000, the family would also be eligible for a larger $1,600 per child tax credit and a $300 credit for each taxpayer and non-child dependent that Republicans have proposed, which is subtracted from the family's overall tax liability.

Mortgage Interest Deduction

The mortgage interest deduction is likely to be the biggest source of debate and lobbying.

The Republican plan will have a cap on the deduction of $500,000 in loan debt for newly purchased homes. That means people with very expensive newly purchased homes won’t be able to deduct the current $1 million on their interest payments.

But fewer people are likely to itemize the mortgage interest deduction if they take the proposed standard deduction of $24,000 for a married couple, which is double the current law.

The real estate, mortgage and homebuilder industries oppose this plan because they fear it will reduce the incentives to buy a home, according to CNN.

The National Association of Realtors said the proposal appears to put "home values and middle class homeowners at risk." The National Association of Home Builders made a similar statement, saying the change "strips the tax code of its most vital homeownership tax benefit."

But renters are left to ask: Why should we subsidize wealthy homeowners?

Child Tax Credit

The plan introduces a new family tax credit that expands the child tax credit and adds a new credit for parents and non-child dependents. The child tax credit will increase 60 percent to $1,600 a child from $1,000, according to the plan. There will also be an additional $300 credit for any parent or non-child dependent.

Increasing the child tax credit is important to make sure that most families do not pay higher taxes, because the plan eliminates the personal exemptions -- currently excluding $4,050 of income from taxes per family member. The personal exemptions are especially valuable to large families.

Earned Income Tax Credit

The bill would make no changes to the Earned Income Tax Credit, a provision that gives low- and moderate-income working families a tax credit equal to a percentage of their earnings. The tax credit extends up to a certain income threshold, beyond which the value of the credit phases out.

The credit is intended to give low-income parents an additional financial incentive to work. Because the EITC is a tax credit, rather than a deduction, even low-income parents who take the new, larger standard deduction of their tax returns would still benefit.

Investment Income

The Republican plan wouldn’t directly change how the government taxes income on investments, but what people will pay could change as a result of other provisions in the plan.

Under current law, the same rules apply to dividends and capital gains but differ depending on an individual’s earnings and how long they have held an asset

Individuals who make less than $37,950 a year pay no taxes when they sell an asset after holding it for a year. Individuals who earn more than that but less than $418,400 a year pay a 15 percent rate long-term capital gains rate and people who earn more than that pay a 20 percent rate. For short-term capital gains — for assets held for less than a year — people pay taxes at the same rate as they do on their ordinary income. The same rates apply to dividends, but investors need to hold the asset for 60 days to qualify.

For individuals earning more than $200,000, they must pay an additional 3.8 percent tax on capital gains and dividends, because of a rule in the Affordable Care Act, also known as Obamacare.

Carried Interest

As a candidate, U.S. President Donald Trump pledged to close the “carried interest” tax break that benefits some of Wall Street’s wealthiest financiers. The Republican tax bill released on Thursday makes no mention of it, Reuters reported.

Carried interest is a share of an investment fund’s profits, typically about 20 percent beyond the return guaranteed to investors, that is paid out to the general partners of private equity, venture capital, real estate and hedge funds.

Under current law, carried interest income is taxed at the capital gains rate of 20 percent. That is well below the 39.6 percent rate that high earners pay on ordinary wages and salary.

No Changes to 401(k)

The plan makes no changes to retirement savings tax breaks such as workplace defined-contribution plans.

Estate Tax

The Republican bill would immediately double the exemption on the estate tax, a levy of up to 40 percent for very large estates when their holder dies, and after six years repeal it entirely.

All but the largest estates -- currently those with a gross value of more than $5.49 million in 2017 -- are exempt from the tax. On average, fewer than 1 out of every 500 Americans who die in a given year leave estates subject to the tax.

Corporate Tax

The corporate tax rate would be cut to a flat 20 percent from the current maximum of 35 percent.

Businesses could immediately expense the cost of new investments instead of writing them down over several years, Bloomberg News reported. The immediate expensing would end in January 2023. The proposed rules would bar companies from deducting interest expenses that exceed 30 percent of a measure of their income.

Multinational companies’ accumulated offshore earnings would be taxed as high as 12 percent. The exemption for executive pay linked to results would be eliminated, denying companies the option to write off large equity awards, according to the newswire.

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House Republicans on Thursday released the Tax Cuts and Jobs Act, setting the stage for public debates on a bill that some analysts see dead on arrival.The most contentious proposals are changes to the mortgage interest deduction that will affect people who live in areas...
tax, reform, donald trump, mortgage
Friday, 03 November 2017 10:52 AM
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