Honesty compels me to report that the final version of the bill passed out of conference represents a significant improvement over either the House or the Senate bill pilloried earlier in these posts.
Many of the just plain mean provisions in the House bill went away; and the Conference committee made a tremendously beneficial change to the individual Alternative Minimum Tax, discussed below.
Plus, the $500 family credit carried over from the Senate bill—and scarcely reported in the press at the time of my last post—eases the squeeze on the typical family of four with no children under 17, reducing the hit from other tax hikes by $2000. My spreadsheets, to be updated in a subsequent post, show that this one provision will make the tax changes a wash for many Californians in the $200,000 plus range. Under earlier bills, these families, along with similar families in New York, were taking about a $2000 hit, net.
Most notably, the Conference bill sets the new threshold for phase-out of the Alternative Minimum Tax at $1,000,000, up from about $165,000. That phase-out has always been the factor that made the AMT a killer for affluent suburban households. In past years, the phase-out created a zone, almost $300,000 wide, in which the marginal AMT rate was 35%, not 28%. In much of that zone, the regular tax rate was at 28% or 33%; hence, every additional dollar of income attained in that zone further drove up the dollar burden of the AMT tax (35% > 28% or 33%; under the AMT, you must pay the greater of AMT versus regular tax). That’s the provision that ensnared the upper middle class over the past fifteen years.
As a result of this one change, many truly affluent but still middle-class taxpayers—the coastal elite among managers and professionals, with dual incomes amounting to $350,000 to $550,000 per family, more or less—are going to save about ten thousand dollars in taxes.
You have probably not read that claim about the new tax bill before.
Here is another surprising outcome: a swath of those families, the ones who have accumulated Form 8801 AMT credits, may save a total of twenty to thirty thousand dollars under the new tax bill. These families will be found mostly in California or New York.
You definitely have not read that claim before!
Because the old AMT was driven heavily by the phase-out of the AMT exemption, many taxpayers in the $350K to $550K range will no longer be subject to the AMT. Although the Republican tax bill does not cut their regular tax burden by much (because of the lost SALT deduction), the new regular tax burden is considerably less than the old AMT burden. And the new regular tax is considerably greater than the new AMT, so these folks don’t pay AMT anymore. Result: savings of $10,000 or more (new regular vs. old AMT).
That ten thousand dollars represents the annual hit these people used to endure from the AMT.
Plus, when you have an AMT credit stored up, from paying AMT in previous years, then in a subsequent year, if you should escape the AMT (because AMT < regular tax) in that year you pay the lower, AMT burden. Since the new AMT amount—for families in this very specific income range—is thousands of dollars less than the new regular tax, the AMT credit (if you are lucky enough to have one) saves these families another ten thousand dollars or so. Surprise!
Now to the politics.
Political implications, I
Do you know if you have a Form 8801 credit? Of course not—no ordinary person bothers with such things.
Do you model your annual AMT burden, under different income scenarios, in a spreadsheet of your own devise? Hah hah.
Conclusion: almost no voter who will benefit from this bell-and-whistle tossed into the Republican tax bill will learn about it before April 2019.
You can do a back of the envelope calculation of how the new regular rates will affect you, mentally subtracting out the lost deduction for SALT. Affluent suburban voters can and will learn that the Republican tax bill doesn’t offer them much—to all appearances.
But nobody does their AMT on the back of an envelope. And no ordinary voter has ever heard of Form 8801, or has any clue how to discover if they personally have an AMT credit stored up.
Result: no suburban voter will discover, in time for the 2018 election, this little present offered up by the Republican tax bill.
Political Implications, II
The little goodie bag described is given only to taxpayers in the specified income range: it falls off rapidly as income rises above $550,000 or falls below $350,000. Natch—this is where the burden of the old AMT fell most heavily.
There is no goodie bag for blue state taxpayers who are W-2 millionaires. On the contrary, this is where the burden of the new Republican tax bill continues to fall most heavily. These voters get slammed. The AMT is not a factor at this income level: they didn’t pay it before and they don’t pay it now.
The math of the tax hike visited on these folks is quite simple. Using California rates, for every million dollars of salary or bonus past the first million:
- The Federal tax rates drops 2.6%, from the old 39.6% to the new 37%. Good!
- Bad: about 13.3% of state income tax can no longer be deducted. Under the old top rate, that saved the taxpayer .133 X .396 = 5.2% tax savings from the deductibility of state income taxes
- Net these out: +2.6% lowered rate – 5.2% lost deductions equals +2.6% of income lost to the Republican tax hike, or a $26,000 hit per million dollars on the W-2.
- If property taxes scale with income (not necessarily the case), at say 3% of income, then another .03 X .396 = 1.1% of tax hike occurs due to the lost property tax deduction, call it $11,000 per million.
- Total hit for blue state W-2 millionaires: as much as $40,000 in additional tax bill per W-2 million earned.*
*If you don’t live in California or New York, the breakeven state tax rate—the rate at which the cut in the top rate to 37% cancels out the hit from the lost deduction for state income taxes—is about 6.5%. Factoring in property taxes, W-2 millionaires, in any state or city where the income tax rate is > 5.5%, will take a hit from the Republican tax bill. The hit will be small, $10,000 or less, in states where the top rate is 5.5% to 6.5%; and grows by about $4000/million for each point higher in the state income tax rate.
Not only is the math simple arithmetic; people at this income level typically have their taxes done professionally. These voters—or should I say, these potential donors—will know by April 2018 how bad things are going to get, when their accountant tells them to increase their withholding or pony up estimated tax. And even at these income levels, a $40,000 hit is enough to notice.
- Most middle class voters won’t notice the increment in their weekly pay check (=$10 to $20). Through November 2018, their approval or disapproval of the Republican tax bill will be driven by media.
- Most affluent suburban voters will assume they got peanuts or worse, and will smolder in resentment throughout the year
- The small segment of past AMT victims that gets a goodie bag won’t find out until long after the 2018 election.
- The even smaller segment of voters (but larger source of donations), whom I’ve termed blue state W-2 millionaires, will find out by April that the Republican tax bill is aimed straight at them; even as they watch their managing partner drive a truck through the new pass-through income loopholes, making out like a bandit. And as they take phone calls from their former colleague, who moved to Houston, and roasts them over the phone: “ha ha—fool!”
But, billionaire business owners, and millionaires in Texas or Florida, should be very pleased.
You tell me: how that will net out in Congressional races in 2018?