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How Trump’s Tax Proposal Impacts Californians Who Itemize

November 3, 2017

(Quick Note:  My plots are referring to taxable income when I really mean “Adjusted Gross Income”, or your taxable income after all deductions.  Updates pending!)

I’ll start by saying that I disagree with the principles behind this tax plan, regardless how it impacts my personal taxes. Not every single idea in it is terrible, but as a whole, it benefits the wealthy while throwing a few crumbs to middle class families with children.

Politics aside, I took a look at how it would affect me, and other people like me. That is, people who own a home in an high cost area with high state taxes (blue states). If you want a more broad and detailed explanation, try this article.  For relatively simple tax scenarios, there are two main factors to consider:

  • Deductions you take that reduce your gross income to your taxable income.   Taxable Income = Income – Deductions.
  • The tax you pay on your taxable income, calculated with the tax brackets

The proposed tax plan reduces the number of itemized deductions available while simultaneously reducing taxes paid for any given taxable income. If your taxable income stays the same, you’ll pay less tax.  (My chart is less pretty than this one that I’ve seen on several media outlets, but it more clearly depicts the situation.)

FedTaxesZoomed

But your taxable income won’t stay the same!  It is necessary to keep in mind that the plan removes personal exemptions, so it is highly misleading to state the standard deduction is nearly doubling.  For married couples without children who don’t itemize, the Personal Exemption + Standard Deduction would go from the current $20,800 ($12,700+$4,050*2) to $24,000.  It would increase, but not by all that much.  If you have a kid or more, it is actually going down a bit – but there are other child credit tax changes that might make up for it.  If you don’t itemize and you are single or married without kids, your tax bill will indeed go down.

As a Californian who saves a lot on taxes due to itemizing property taxes, state taxes, and mortgage interest, my taxable income is going to go up rather than down.  The red line below shows how much it could go up (how many deductions I could lose) before I would see an increased tax bill.  Considering our taxable income is automatically going up by $8,100 due to the loss of the personal exemption, how much MORE could our taxable income go up and leave us with the same tax bill?  That’s the purple line.  So, if we had a taxable income of $125k, we could lose about $5,000 more in deductions and still come out with a similar tax bill.  I’ve overlaid California state taxes, which could no longer be deducted under this plan. (Disclaimer: I haven’t double checked everything, so let me know if this seems off.)

TaxResult

If you are a California home owner who itemizes, and expects to continue to itemize, this chart says you are probably going to see a tax increase!   If you live in a different state with state income taxes, you can figure out if you are likely to have an increase under the proposed plan by comparing the purple line to your state tax bill.

But, if you make more than 320k for MFJ, then the Pease limitation jumps in and complicates things!  Maybe you won’t see a tax increase!

Personal tax situations aside, this tax bill gives massive tax breaks to the wealthy and repeals provisions that ensure they pay their fair share.  It eliminates the alternative minimum tax, and provides a 4.6% cut for marginal income between $470,700 and $1 million (for married couples), and eliminates the estate tax (which only impacts estates greater than ~$5M). It also increases the deficit and provides corporate tax cuts. Please call your representatives and take action against this tax bill.

 

 

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