Think I’m exaggerating? Feast your eyes.
[All page references are to the November 5th, 2017 explanation of the bill posted by the Joint Committee on Taxation, JCX-50-17 ]
[All comparisons are against values declared for 2018 by the IRS, accessed here.
- Bye bye, exclusion of gain on a personal residence
For many years now, a married couple could exclude gain on sale of their personal residence up to $500,000, if they met certain conditions (two years residence, etc.).
But now, if their income is above $500,000 in the year of sale, they lose that exclusion dollar for dollar, to the extent their other income exceeds $500,000.
That couple’s marginal tax rate, in the income range of $500K to $1000K, on each extra dollar of income in the year of sale, will therefore be:
- the regular rate for that bracket of 35%,
- plus the 20% capital gains rate on the lost exclusion, for a total, at first glance, of 55%;
- if in California, without the deductibility of state taxes, the actual marginal rate will be 35 + 20 + 11 + 11 = 77% (California gives no break for capital gains, so the 11% would apply to the incremental income and the exposed house gain)
- This rate is ameliorated somewhat by the fact that income is averaged over three years for the determination. So the rate would actually be 35 + 11 + (.33 * 20) + (.33 * 11), on the extra regular earnings that triggered loss of a portion of the exclusion.
Didn’t follow that? Okay, suppose you sell your house for exactly a $500,000 gain in 2018. Your wage income, as planned, was to be exactly $500,000 in 2018, and had been exactly that amount in 2017 and 2016. No problem for you—there’s no change to the current home sale exclusion rules at this break point, hence you don’t owe a penny of tax on your house sale gain.
Ah, but then you get an unexpected raise, or bonus, or stock award, yada yada, in the amount of $50,000, on top of the $500,000 salary you expected in 2018.
- That $50,000, as ordinary income, is taxed at 35% Federally, and 11% California
- But that raise makes your average income over the three years equal to $516,666, not $500,000, which causes you to lose $16,666 of your home sales exclusion, which in turn exposes $16,666 of your home sale gain to capital gains tax of 20% on that amount
- If California law continues to follow Federal law, that newly exposed $16,666 capital gain will also incur state taxes of about 11% (residents of New York can perform a similar calculation).
- So now, relative to the unexpected bonus income of $50,000 in 2018, we have taxes of 35% + 11% + 6.66% + 3.66%, or 56.33%
- Come to think of it, if the $50,000 were wage income, it would also be subject to Medicare tax of 2.9% + 0.9%, for a total marginal rate of 60%, more or less.
As President Frump claimed, it’s the Cut Cut Cut Tax act—as in cut your face with a knife, back and forth, again and again.
Or as I say, “Thank you, party of Ronald Reagan, for imposing a new 60% tax bracket on certain prosperous households attempting to downsize after their children grew up.”
- Too bad about your widowed mother, getting by on $22,000 of AGI per year
Next year in 2018, she was planning to subtract from that income her personal exemption of $4150, and her standard deduction of $6500, plus her over-65, enhanced standard deduction of $1600, leaving taxable income of $9750. In the current 10% tax bracket, she would have owed $975.
But, courtesy of the Republican tax bill, she loses her personal exemption ($4150), and loses the over-65 enhancement $1600). But she gains $5700 from the increased standard deduction, now $12,200. Her taxable income becomes $9800
Alas, she’s now in the 12% tax bracket, so the total tax burden has grown to $1176. Except, if the new $300 personal exemption survives, she can subtract $300, so the new tax burden would be $876.
So she does get a tax cut, of just under $100…
Hey—what kind of country would it be, if elderly widows weren’t willing to minimize their demands for tax relief, in order to lower the rate of tax on the owners of capital, and on mega-billion dollar corporations, and on the scions of billionaires?
Maybe rename it, the “Widows Sacrifice for Paris Hilton Act”?
- Are you a professor at a private university, hoping to take advantage of free tuition for university employees, for that beloved child of yours?
If I had sent my child to the private university where I labored for thirty years, tuition would have been waived as an employee benefit. That would have saved me approximately $50,000 off the rack rate in 2017-18—and the same for the three years after that—a huge perk.
No more. Under the Republican tax bill, that $50,000 would be added to my gross income, and to my employment income for purposes of FICA taxes.
So if my income as a married person was over $90,000 beforehand, the $50,000 of tuition reimbursement would incur tax at 25%, or $12,500. About three-fifths of it would also incur OASDI tax of 6.2%, and all of it would incur Medicare tax of 1.45%, for a total of about $2600 more ([.062* .6 * 50000] + [.0145 * 50,000]).
If California again conforms to Federal law, another 9% of state income tax will be imposed, or $4500; and that state tax will be no longer deductible.
The tuition cost of sending my child to the university that employed me for thirty years goes up from zero, to $19,500 in extra tax paid.
Good thing I sent my kids to the University of California, where tuition runs thousands of dollars less, at about $14,000 per year.
But hey: how many votes is an Arkansas Republican gonna lose, for sticking it to them pinko, Godless, uppity professors? And how many ordinary folks staggering under their own tuition bills will feel any sympathy for the professors who lost this perk?
- You wanted help adopting a child through all proper procedures?
- You were hoping to deduct the nursing home and other medical expenses of your aged parent?
Fuhgeddaboudit. Maybe put her on Medicaid instead?
- You wanted to deduct the interest on those student loans you incurred in the pursuit of the American dream?
Fuhgeddaboudit. College is for people who can afford it without borrowing. Know your place.
- Were you hoping for help with your daycare expenses?
Fuhgeddaboudit. Shouldn’t have had kids if you can’t afford to pay full freight. Anyway, why isn’t your wife at home caring for the kids, like a good Christian should?
This change was reversed Monday, showing, perhaps, what pressure can do.
* * *
Of course, the Republican tax bill is not all bad. If you are a billionaire heiress, it’s a wonderful thing.
Likewise, if you run a small business that invests any capital—say, a machine shop—it could save you tens of thousands of dollars in taxes, maybe more.
And if you are a mega-corporation with billions of profits stashed overseas—time to start salivating!
Plus, the bill allows you to make one additional 529 contribution in the year your child was conceived but unborn (which only matters if you conceive April or later)
What’s good for billionaires, and mega-corporations, and the unborn child of the affluent, is good for ordinary Americans—right?
Too bad if you fall into one of the targeted classes named above, and have to pay hard cash now, while waiting for the indirect benefits touted by the Wall Street Journal editorial page…