How Will Tax Reform Really Affect You?

How Will Tax Reform Really Affect You?

With all of the "noise" in the news the past few weeks regarding tax reform, it's tough to sort out the substance versus the partisan posturing. While the House and Senate negotiators finish reconciling versions of the plan and emerge from their conference committee with a cohesive bill, it’s worth taking a look at four key provisions of the Senate and House bills that have received the most press and break down the differences and similarities between them.

1) Mortgage interest deduction

What is it: The mortgage interest deduction allows homeowners to reduce their taxable income by the amount of interest paid on their mortgage. It’s only available to taxpayers who itemize, and historically has been used as an incentive for homeownership.

House plan: Places a $500,000 cap on how much interest new homeowners can deduct from their mortgage if they itemize (current homeowners will still be able to deduct $1 million). This version of the plan has infuriated leaders in housing who feel the limit will discourage homeownership. However, as I mentioned in my last blog, most economists are suggesting that any changes to the deduction will have a minimal effect on housing. Some, however, might suggest that because this generally affects only the most wealthy 1%, it could have "unintended consequences" in the trickle-down effect...

Senate plan: Keeps the mortgage interest deduction untouched with the limit remaining at $1 million for new and current homeowners.

2) Standard deduction

What is it: The standard deduction reduces a taxpayer's taxable income based on their filing status. Taxpayers who itemize cannot use the standard deduction. The amount taxpayers can deduct changes each year to keep in line with inflation. Although both chambers propose doubling the deduction, they do vary slightly in terms of the amount by which they will increase.

House: For singles, the deduction would go from $6,350 to $12,200. For married couples filing jointly, the deduction increases from $12,700 to $24,400.

Senate: Singles can deduct up to $12,000 while married couples filing jointly can deduct $24,000.

3) Tax brackets

What is it: Federal tax brackets are the divisions in which individuals are taxed based on their income.

House: Reduces the number of tax brackets from seven to four. Currently, the brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. Under the House plan, the new rates would be 12 percent, 25 percent, 35 percent and 39.6 percent.

Senate: Keeps the seven federal tax brackets intact but changes the rate at which taxpayers’ income is taxed. In the Senate’s bill, the new rates would be 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 38.5 percent.

4) Property taxes

What is it: A tax based on the value of property an individual owns — including the land and improvements — and is assessed by local municipalities or governments.

House and Senate: Currently, taxpayers who itemize can deduct local and state taxes. Both chambers are proposing to eliminate those deductions but keep the property tax deduction intact, BUT, with the caveat that Property owners would only be able to deduct up to $10,000 on their property taxes.

Anyone not in the top income brackets are not as likely to be affected by changes to the Mortgage Interest Deduction, especially combined with the fact that you must also itemize on your tax returns for this to apply. But if this doesn't apply to you, the Standard Deduction increase will definitely be beneficial to those in lower income brackets. The cap on the Property Tax deduction has the potential to affect a LOT more people in the Central Texas area, however. And while I'm sure that the federal economists, tax experts and actuaries have done their math in advising these new tax brackets, the biggest question or concern (per Mark Sprague, a Texas Real Estate Economist ) are the "unintended consequences" that tend to occur when sweeping policy changes such as these are enacted.