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How Trump’s tax plan would affect Californians (San Francisco Chronicle)
President Trump’s tax proposal for individuals would give California taxpayers some tax breaks but take away others. Without more details, it’s impossible to say what the net effect would be, but here are a few things we can surmise from the bare-bones plan released Wednesday.
Taking away the itemized deduction for state and local income and property taxes would hurt people in high-tax states such as California more than those in low-tax states. High-tax states tend to be blue or Democratic-leaning. This could put pressure on states to cut taxes, because they would no longer be subsidized by the federal government.
On the other hand, Trump’s plan to kill the alternative minimum tax would offset, to an extent, the loss of the state and local tax deduction. That’s because state and local taxes are not deductible under the AMT. For people subject to AMT, losing the state and local tax deduction while escaping from AMT could be a wash. Again, the AMT hits people in high-tax states more than low-tax ones.
The Trump plan could, at the margin, make renting a home more attractive financially than buying one. Even though the plan would retain the mortgage interest deduction, it also would double the standard deduction, so fewer taxpayers would itemize deductions. As a result, fewer people would benefit from the mortgage interest deduction, although those with Bay Area-size mortgages probably would.
Doubling the standard deduction and killing the property tax deduction “would effectively nullify the current tax benefits of owning a home for the vast majority of tax filers,” and could cause home values to “plummet,” the National Association of Realtors said in a press release.
Trump’s plan to kill the estate tax would help Californians, who pay a disproportionately large share of the tax.
The plan, which also included corporate tax cuts, was announced Wednesday in a one-page document and press briefing by Treasury Secretary Steven Mnuchin and National Economic Director Gary Cohn.
It would create three tax rates for individuals — 10, 25 and 35 percent. That’s a little different than the 12, 25 and 33 percent rates Trump proposed during his campaign. Today, there are seven brackets, ranging from 10 to 39.6 percent.
Cohn and Mnuchin would not say what income those rates would apply to. Nor did they say what would happen to the 0.9 percent Additional Medicare Tax that applies to incomes over $250,000 (married) and $200,000 (single), but Trump in the past has proposed axing it.
Long-term capital gains and dividends would be taxed at a top rate of 20 percent, doing away with the 3.8 percent Medicare surcharge that high-income people pay on investment income over certain amounts.
All itemized deductions, except for mortgage interest and charitable contributions, would go away. This includes the deductions for state and local income and property taxes, medical expenses and miscellaneous items.
The plan would double the standard deduction. That would take it to $25,400 for married couples and to $12,700 for singles.
Today, about 40 percent of households don’t pay any federal tax, so lowering tax rates or increasing the standard deduction won’t help them, said Roberton Williams, a senior fellow with the Tax Policy Center, a think tank.
About 70 percent of households take the standard deduction. To itemize under Trump’s plan, a married couple would need more than $25,400 in mortgage interest and charitable donations combined. The interest on a $600,000 mortgage at 4 percent interest works out to around $23,000 the first couple of years.
The plan is mum on the personal exemption, which lets households deduct $4,050 per person. During the campaign, Trump proposed eliminating it, in connection with doubling the standard deduction.
The proposal would kill the vexing alternative minimum tax. People calculate their tax under the regular system and under the alternative system and pay whichever is higher. National Taxpayer Advocate Nina Olson has been imploring Congress to repeal this nightmare for 15 years.
Trump would repeal the estate tax, which affects the portion of estates that exceeds about $5.5 million per person. In 2015, the tax brought in $17.1 billion, of which 26 percent came from California, even though California accounts for only 12 percent of the U.S. population.
The plan would retain deductions for retirement savings, but said nothing about a host of other deductions that can be taken even if taxpayers do not itemize. These “above-the-line” deductions include such things as student loan interest, college tuition and fees, educator expenses and certain moving expenses.
It also says nothing about a bevy of tax credits available to individuals, including the earned income and child tax credits. “I have not seen any proposals to eliminate those,” so presumably they’re safe, said Kyle Pomerleau, director of federal projects with the Tax Foundation, a research organization.
Trump proposed cutting all business taxes to 15 percent. This would affect companies large and small, including “pass-through” entities such as partnerships, limited liability companies and sole proprietorships. These entities pay no tax at the corporate level. Instead, the owners pay tax on their share of the profits at their individual tax rates.
A 15 percent business rate could create incentives for employees, who under the plan would be taxed at rates up to 35 percent, to become independent contractors, and pay just 15 percent.
Mnuchin said the administration would work with Congress to prevent that from happening, but didn’t say how. Keith Hall, CEO of the National Association for the Self-Employed, doesn’t see how to create a tax that applied to sole proprietors but not freelancers or independent contractors.