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Not exactly. The new tax code allows mortgage interest deduction for loan amount upto $750K. But will only allows a combined mortgage interest and State & Local income tax deductions upto $10K. So in reality this will severely limit the loan amount one can deduct the mortgage interest.
Just looking at the mortgage interest alone, this will cap your loan amount to less than ~$300K (monthly P&I = $1,400 assuming 4% @30 yrs, P=$515). This does not include your State & Local income tax deduction.
OK, can anyone give an example of how much money they will not actually get back?
A deduction is NOT what anyone gets back, it just drops the amount taxed and maybe if right at the edge drops you into a lower tax category. OK, how much actual money will be lost? It looks like if you, a single person, could claim $12,000.00 in the past now you can only claim $10,000.00. OK your taxable income goes up $2,000.00. If you make $120,000.00 and no other deductions exist, then it might be $500.00 in higher taxes. I would rather not pay that (and won't as I take the standard deduction, so will be better off) but I have never seen a tax change that did not cost some people more money and some less. It looks like the majority of people will benefit and a minority will not. The article said just under 11% would not benefit, so over 88% would. It seems that with no change the 11% would be better off and the 88% would not be?
OK, can anyone give an example of how much money they will not actually get back?
A deduction is NOT what anyone gets back, it just drops the amount taxed and maybe if right at the edge drops you into a lower tax category. OK, how much actual money will be lost? It looks like if you, a single person, could claim $12,000.00 in the past now you can only claim $10,000.00. OK your taxable income goes up $2,000.00. If you make $120,000.00 and no other deductions exist, then it might be $500.00 in higher taxes. I would rather not pay that (and won't as I take the standard deduction, so will be better off) but I have never seen a tax change that did not cost some people more money and some less. It looks like the majority of people will benefit and a minority will not. The article said just under 11% would not benefit, so over 88% would. It seems that with no change the 11% would be better off and the 88% would not be?
Let's do the following example as a comparison. Same person with a California taxable income of $100K (not gross, mind you, to make it easier).
Say he owns a $500K house with 20% down so a mortgage is $400K @4% interest rate for 30 years. His monthly P&I is $1,910. Assuming roughly 30% is principal so the portion of mortgage interest deduction is 2/3 of $1,910 = 1,273. So his annual mortgage interest is $15,280.
Under the OLD tax law, his itemized deduction will be ALL of $15,280 mortgage interest, plus his State income tax $6,656.53 = $21,937. This will effectively drop his "taxable income" from $100K to ~$78K. So... under the Federal 2016 income tax will now fall under the "...$10,367.50 plus 25% of the amount over $75,300..." which is $10,367.50 + 25% ($78,000 - $75,300) = $11,042.
But now under the NEW tax law, he can only deduct $10K from combined mortgage interest & State income tax. His federal taxable income will then be $100K - $10K = $90K. Under the Federal 2016 income tax will now fall under the "...$10,367.50 plus 25% of the amount over $75,300..." (same link from above) which is $10,367.5 + 25% ($90,000 - $75,300) = $14,042.
In this scenario, he will pay an extra federal income tax of $14,042 - $11,042 = $3,000. This is due to the fact his taxable income increase as result of less deduction allowed under the new tax rule.
This is an extremely simplistic example to show the effect of new tax law change just on the effect of income tax and mortgage interest deductions. In reality when his taxable income drops to $75K his California State income tax will also drop so one will need to iterate. This also does not take into account of doubling the standard deduction from $6,000 for a single person to $12,000, but eliminating the personal exemption of $4,050.
With the elimination of SALT deductions, states with high tax burdens are going to lose the most (California, New York, Massachusetts, etc).
The property tax deduction only significantly hurts people who are leveraged up to their ears in debt. Those people are usually on here happily defending the high cost of California, and the benefits of high taxes for entitlement programs, so I'm sure they don't mind the extra tax burden.
With the elimination of SALT deductions, states with high tax burdens are going to lose the most (California, New York, Massachusetts, etc).
The property tax deduction only significantly hurts people who are leveraged up to their ears in debt. Those people are usually on here happily defending the high cost of California, and the benefits of high taxes for entitlement programs, so I'm sure they don't mind the extra tax burden.
Humm, why should people in States who have no State income tax pay more for Federal activities than those in States with an income tax? One group pays less for the same benefits? And none of the; CA pays more to other States, as it works out to about 1% that does not .... come back to CA. Doesn't sound fair to me.
It seems like people in CA pay more for less, through the State tax.
Humm, why should people in States who have no State income tax pay more for Federal activities than those in States with an income tax? One group pays less for the same benefits? And none of the; CA pays more to other States, as it works out to about 1% that does not .... come back to CA. Doesn't sound fair to me.
It seems like people in CA pay more for less, through the State tax.
California Democrats have been progressively increasing the tax burden statewide for decades where it's now a Top 5 state for individual tax burden imposed.
If people in California want less tax burden, they need to look at their local senator or assemblyman and ask some hard questions.
Say he owns a $500K house with 20% down so a mortgage is $400K @4% interest rate for 30 years. His monthly P&I is $1,910. Assuming roughly 30% is principal so the portion of mortgage interest deduction is 2/3 of $1,910 = 1,273. So his annual mortgage interest is $15,280.
Under the OLD tax law, his itemized deduction will be ALL of $15,280 mortgage interest, plus his State income tax $6,656.53 = $21,937. This will effectively drop his "taxable income" from $100K to ~$78K. So... under the Federal 2016 income tax will now fall under the "...$10,367.50 plus 25% of the amount over $75,300..." which is $10,367.50 + 25% ($78,000 - $75,300) = $11,042.
But now under the NEW tax law, he can only deduct $10K from combined mortgage interest & State income tax. His federal taxable income will then be $100K - $10K = $90K. Under the Federal 2016 income tax will now fall under the "...$10,367.50 plus 25% of the amount over $75,300..." (same link from above) which is $10,367.5 + 25% ($90,000 - $75,300) = $14,042.
In this scenario, he will pay an extra federal income tax of $14,042 - $11,042 = $3,000. This is due to the fact his taxable income increase as result of less deduction allowed under the new tax rule.
This is an extremely simplistic example to show the effect of new tax law change just on the effect of income tax and mortgage interest deductions. In reality when his taxable income drops to $75K his California State income tax will also drop so one will need to iterate. This also does not take into account of doubling the standard deduction from $6,000 for a single person to $12,000, but eliminating the personal exemption of $4,050.
I might be misunderstanding example, but I don't think you are correct. The mortgage interest deduction has nothing to do with SALT. SALT is state income and property taxes. You will still be able to deduct the full interest on loans of up to $1 mil or $750k if you are not grandfathered.
There is a very specific person who will get hit by this in CA.
Someone who is not making enough to trip AMT, but pays a decent amount of state tax and has an expensive home.
Let me walk you through 3 examples.
1) High earning couple that makes $400k combined - they are already tripping AMT, so they can't take full advantage of the existing SALT deductions anyway. For them, the SALT change is irrelevant.
2) A family with $120k income and a home appraised at $400k with a $200k mortgage. They will pay more. Their current income tax is 9% * $120k or $10.8k. Their property tax is $4.4.k. They were previously able to deduct $15.2k of SALT. Now they can only deduct $10k. Assuming a 25% federal tax rate, their tax bill goes up by $1.3k (25%*$5.2k). They can still deduct the full interest expense.
However, their tax bracket is also going down to 22% from 25% so they should come a bit ahead.
3) A family with $200k income. Doesn't trip AMT. Bought a $1.1 million house in Huntington Beach in December and put 15% down. Previously, they were able to deduct all of their $20k in state income taxes (10%*$200k) and all of their $11k in property taxes or a total of $30k. They could also deduct all of the interest on their $935k loan.
Now, they will be able to deduct only $10k in SALT, so assuming 25% federal tax rate, they will now have to pay an additional $5.2k in taxes. On top of that, they can now only deduct interest on $750k of the loan, so assuming a 4% interest rate, they will now lose an additional $1.85k from that lost interest deduction. (4%*(935k-750k))*25%. So their total tax burden will go up by $5.2k+$1.85k=$7k.
However, under the previous tax law, their income tax was 28%. Now it is going to 24%. I used 25% above for easier math. So their federal tax burden will drop by 4%*200k=$8k for simple math, so net/net it comes out as a wash.
I might be misunderstanding example, but I don't think you are correct. The mortgage interest deduction has nothing to do with SALT. SALT is state income and property taxes. You will still be able to deduct the full interest on loans of up to $1 mil or $750k if you are not grandfathered.
There is a very specific person who will get hit by this in CA.
Someone who is not making enough to trip AMT, but pays a decent amount of state tax and has an expensive home.
Let me walk you through 3 examples.
1) High earning couple that makes $400k combined - they are already tripping AMT, so they can't take full advantage of the existing SALT deductions anyway. For them, the SALT change is irrelevant.
2) A family with $120k income and a home appraised at $400k with a $200k mortgage. They will pay more. Their current income tax is 9% * $120k or $10.8k. Their property tax is $4.4.k. They were previously able to deduct $15.2k of SALT. Now they can only deduct $10k. Assuming a 25% federal tax rate, their tax bill goes up by $1.3k (25%*$5.2k). They can still deduct the full interest expense.
However, their tax bracket is also going down to 22% from 25% so they should come a bit ahead.
3) A family with $200k income. Doesn't trip AMT. Bought a $1.1 million house in Huntington Beach in December and put 15% down. Previously, they were able to deduct all of their $20k in state income taxes (10%*$200k) and all of their $11k in property taxes or a total of $30k. They could also deduct all of the interest on their $935k loan.
Now, they will be able to deduct only $10k in SALT, so assuming 25% federal tax rate, they will now have to pay an additional $5.2k in taxes. On top of that, they can now only deduct interest on $750k of the loan, so assuming a 4% interest rate, they will now lose an additional $1.85k from that lost interest deduction. (4%*(935k-750k))*25%. So their total tax burden will go up by $5.2k+$1.85k=$7k.
However, under the previous tax law, their income tax was 28%. Now it is going to 24%. I used 25% above for easier math. So their federal tax burden will drop by 4%*200k=$8k for simple math, so net/net it comes out as a wash.
Interesting. So in general low income earners benefit. Earners with no Mortgage, say a paid off home also benefit if they use the standard deduction. Both also potentially benefit due to lower tax rates and the doubling of the standard deduction. Maybe CA could do something beneficial to low income earners like this? . Some higher income earners may pay more. Higher income earners paying more seems to be popular in CA in any event, so no one should be complaining.
So my earlier post was about facts, the way I understand them. Below is pure speculation. Based on the math above, I think that house prices will not go down. I actually think they will go up. As you see, for most people in CA the tax reform is going to be a wash. If you are rich, you might actually be coming out ahead, since there will be some relaxations on AMT and your tax rate drops. However, people who are already in their homes will be less likely to move, because they have some advantages grandfathered.
So net/net, people who still want to buy houses will be in a similar financial position as before, or even marginally better, while people who already own houses will have less incentives to move unless going out of state. So property values should move up barring a recession.
So my earlier post was about facts, the way I understand them. Below is pure speculation. Based on the math above, I think that house prices will not go down. I actually think they will go up. As you see, for most people in CA the tax reform is going to be a wash. If you are rich, you might actually be coming out ahead, since there will be some relaxations on AMT and your tax rate drops. However, people who are already in their homes will be less likely to move, because they have some advantages grandfathered.
So net/net, people who still want to buy houses will be in a similar financial position as before, or even marginally better, while people who already own houses will have less incentives to move unless going out of state. So property values should move up barring a recession.
True.
Houses are still selling even though the cost keeps rising, so any additional costs associated with the tax plan are not likely to have much of an impact.
One of the condos in my complex recently sold for 420.00. Now there are 2 for sale both priced at 485.00!! That's a big jump. I'll update when/if they sell and what they went for.
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) but I have never seen a tax change that did not cost some people more money and some less. It looks like the majority of people will benefit and a minority will not. The article said just under 11% would not benefit, so over 88% would. It seems that with no change the 11% would be better off and the 88% would not be?
