See my earlier post for a definition of the urban affluent class and the description of the four example households, and for an explanation of the shell game metaphor.
Today’s post adds an analysis of the Senate Republican bill (JCX-51-2017, November 9th), allowing a comparison of what these families would pay now, versus under the House bill, versus under the Senate bill.
The Senate Shell Game
- The standard deduction doubles
- Personal exemptions go away
- State and local income taxes can’t be deducted anymore, not even property taxes
- Rate brackets are not collapsed but stay at seven; some rates drop, and some income thresholds are changed.
- The Alternative Minimum Tax goes away
There are many other changes, of course, including an increase to the child tax credit. To keep things simple, throughout I’ll assume a family of four, with the children over 17 and no longer eligible for the child tax credit (perhaps to be revisited in a future blog post). So, one child is 18 and at the local community college, one child is 19 or 20 and away at college. Nobody in my examples benefits from any of the college credits or deductions, so we can also ignore any changes in those.
Four examples
I take a family earning $200,000 and one earning $400,000, and place them in greater Los Angeles (state income tax bracket about 10% at these levels), or Dallas (no state income tax). Current mortgage is set at 2X income in Dallas, 2.5X income in Los Angeles, with interest paid at 4.5%. Property tax is 1% of property value in Los Angeles, on property worth 33% more than the mortgage; but 2% of the same in Texas (where property tax runs high).
Prosperous at $200K: Dallas, Texas
| Today (2018 rates) | House Republican plan | Senate Republican plan | |
| Adjusted Gross Income*
(Bottom of the front page of your 1040) |
$200,000 | $200,000 | $200,000 |
| Four personal exemptions | (16,600) | — | — |
| Mortgage interest | (18,000) | (18,000) | (take standard) |
| Property tax | (10,650) | (10,000) | — |
| Standard deduction, if better | (24,000) | ||
| Taxable income | $154,750 | $172,000 | $176,000 |
| Total tax,
Now:10%/15%/25% brackets House: 12% on $90,000 25% on excess up to $260,000 Senate: see JCT report |
$30,000 |
$31,300 |
$32,492 |
| New personal credits (which expire) | (1200) | — | |
| Result: | ~wash | Tax hike! |
For our prosperous Dallas family, the House tax plan was about a wash—if the personal credit stays. But the Senate bill imposes a tax hike of almost $2500.
Huh—the Senate imposes thousands of dollars in additional taxes on these rock-ribbed Texas Republicans? How’d that happen?
Ah, if their two kids were 17 or under, then there would be a tax cut, via the new child tax credit of $1650 x 2, or $3300. (In earlier years, when these Texans’ kids were younger, their income was too high for the Bush child tax credit, which they did not get to enjoy.) The new child tax credit, available through their income level, is a significant cut. Too bad their kids grew too old!
Doing alright at $200,000: Los Angeles, California
| Today (2018 rates) | House Republican plan | Senate Republican plan | |
| Adjusted Gross Income*
(Bottom of the front page of your 1040) |
$200,000 | $200,000 | $200,000 |
| Four personal exemptions | (16,600) | — | — |
| Mortgage interest | (22,500) | (22,500) | Take standard |
| Property tax | ( 5,000) | ( 5,000) | — |
| State income tax | (10,000) | — | — |
| Standard deduction, if better | (24,000) | ||
| Taxable income | $145,900 | $172,500 | $176,000 |
| Total tax,
Now:10%/15%/25% brackets House: 12% on $90,000 25% on excess up to $260,000 Senate: see JCT report |
$27,782 |
$31,425 |
$32,492 |
| New personal credits (which expire) | (1200) | — | |
| Result: | Tax hike! | Tax hike! |
Whoa! This family doing alright ($200,000 is barely comfortable in LA) takes it on the chin in the Senate plan: a $4500 tax hike –ouch! At least the Senate bill is ideologically consistent in treating Californians even worse than Texans.
Well, serves those blue state denizens right for voting 2 to 1 against Donald Trump, and sending so few Republicans to Congress. Sock it to them!
Oh—how many Republican representatives are there now from California?
Well that’s some consolation: how many fewer Republicans might there be, after this tax hike passes? Will any affluent suburban Californians ever vote Republican again?
Doing well at $400K: Dallas, Texas
| Today (2018 rates) | House Republican plan | Senate Republican plan | |
| Adjusted Gross Income*
(Bottom of the front page of your 1040) |
$400,000 | $400,000 | $400,000 |
| Four personal exemptions (after phaseout) | (10,200) | — | — |
| Mortgage interest | (36,000) | (36,000) | (36,000) |
| Property tax | (21,600) | (10,000) | — |
| Deductions lost to phaseout | +2,400 | — | — |
| Taxable income | $334,600 | $354,000 | $364,000 |
| Total tax,
Now:10%/15%/25% brackets House: 12% on $90,000 25% on excess up to $260,000 Senate: see JCT report |
$85,143 |
$86,200 |
$85,042 |
| New personal credits (which expire) | (1200) | ||
| Result: | ~wash | ~wash |
Once again, this more affluent Texan family is left empty-handed, but doesn’t suffer much of a hike either.
Is that what these Republican voters expected? Any there any Republican Texan senators running for election next year? Will voters be happy to hear that at least they weren’t punished—or is that not a winning election platform, as in “I didn’t hurt you.”
Getting ahead on $400,000: Los Angeles, CA
| Today (2018 rates) | House Republican plan | Senate Republican plan | |
| Adjusted Gross Income*
(Bottom of the front page of your 1040) |
$400,000 | $400,000 | $400,000 |
| Four personal exemptions (after phaseout) | (16,600 (AMT) | — | — |
| Mortgage interest | (45,000) | (45,000) | (45,000) |
| Property tax | (10,000) (AMT) | (10,000) | — |
| Deductions lost to phaseout | ( 2,400) (AMT) | — | — |
| State income tax | (30,000) (AMT) | — | |
| AMT exemption remaining | (39,075) | — | |
| Taxable income (AMTI) | $313,525 | $345,000 | $355,000 |
| Total tax,
Now:10%/15%/25% brackets House: 12% on $90,000 25% on excess up to $260,000 Senate: see JCT report |
$83,957 |
$83,050 |
$82,117 |
| New personal credits (which expire) | (1200) | ||
| Result: | Tax cut | Tax cut |
Well whaddaya know: at this income level, the Californian family does better than the Texan family, saving over $2000 per year. But that’s only because the convoluted AMT system is abolished.
But wait—what is the meaning of this text, from page 107 of JCT-50-17 from November 5th, preserved in JCT 51-17 from November 9th, page 54:
“The proposal allows the AMT credit to offset the taxpayer’s regular tax liability for any taxable year. In addition, the AMT credit is refundable for any taxable year beginning after 2018 and before 2023 in an amount equal to 50 percent (100 percent in the case of taxable years beginning in 2022) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Thus, the full amount of the minimum tax credit will be allowed in taxable years beginning before 2023.”
On its face, if you happen to have an AMT credit from prior years, then you can deduct all of it against your regular tax, and if your credit carryover exceeds your regular tax liability in, say, 2018, you can also get a refund of 50% of the unused credit—the government will cut you a check.
If I’m correct, and this Californian couple has been paying AMT for years, then they may owe zero taxes next year. Take that, red state Republican voters! (Most ordinary people who regularly pay AMT of a few thousands per year live in blue states; the truly wealthy AMT taxpayers are scattered more broadly.)
Of course, the California bonus, as this might be called, is unintentional—the provision is aimed at one Donald Trump, who, if his 2005 tax return is any indication, stands to get tens of millions of dollars in tax-free cash out of this provision.
PS: to see what your own AMT tax credit may be (it could be hundreds of thousands of dollars, assuming you’ve paid AMT for a decade or more), simply open last year’s return in Turbo Tax, create a mock version for purposes of simulation, and give yourself enough 1099-R income to take your AGI to $700,000 or so. Then look for Form 8801 in the forms list. It will reveal the amount of your AMT credit.
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