Archive for the ‘Tax deductions’ Category

California braces for outbound migration of fat cats…

January 23, 2018

Loss of SALT deduction may be the straw that breaks the camel’s back.

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Last week, we reported some moving data from United Van Lines that indicated “moving deficits” in high tax & spend states: Illinois, New York, New Jersey, Connecticut, Massachusetts.

See Northeast states continue to experience a “moving deficit”…

We expressed surprise that California was rated as “neutral” not “outbound”.

Well, according to the Sacramento Bee, it’s just a matter of time.

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Even Gov. Jerry Brown has observed: ““People with higher incomes will pay a lot taxes (when SALT taxes deductions are cut), and some of them may be tempted to leave.”

That’s a problem because “The state’s wealthiest 1% pay 48 percent of its income tax, and the departure of just a few families could lead to a noticeable hit to state general fund revenue.”

In the past, California passed tax increases with impunity, assuming that “elites are embedded in the regions (like California) where they achieve success, and they have limited interest in moving to procure tax advantages.”

Now, that’s not a certainty, and the state is considering some very creative (and, somewhat laughable) ways to offset the likely drop in individual tax receipts ….

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Polls: Near-majority opposes GOP tax plan.

December 18, 2017

Gomer Pyle observes: Surprise, surprise, surprise.
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MSM is taking great delight reporting polls that show a near- majority of opposing the emerging GOP tax plan.

Some polls have the opposition as high as 55%.

USA Today reports that 48% oppose it and explains:

“53% of those surveyed predict their own families won’t pay lower taxes as a result of the measure.”

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Let’s unpack the survey results ….

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Which states get hit hardest when SALT deduction is eliminated?

December 13, 2017

Looks like it might just be rich folks paying their fair share.

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Everybody knows that tax-payers in liberal-leaning states (CA, NY, NJ, MA, CT) will get hit the hardest when the GOP plan to eliminate the SALT (state & local taxes)  deduction is disallowed.

And, everybody has probably heard Chuckie Schumer whine about how New Yorkers toss more into the government coffers than they get back.

The Rockefeller Institute of Gov’t pulled together those 2 observations into an interesting (albeit a bit complicated) chart.

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click to enlarge

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Let’s decode the chart …

The vertical axis basically indicates if a state puts a low or high SALT burden on its residents.

The horizontal axis indicates if a state’s Balance of Payments with the Feds is positive (to the left) or negative (to the right).  That is, does the state get back from the Feds (in goods and services) more or less that its residents pay in Federal taxes.

For example, Hew York is in the upper right quadrant.

Chuckie is right: New York (a high SALT state) pays more to the Feds than it gets back.

Maryland and Virginia are in the upper left quadrant: residents pay high SALT but get more back from the Feds than they pay in Fed taxes.

All of which illuminates a couple of interesting points …

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Reality Check: How much will YOUR income taxes go down (or up)?

December 11, 2017

Here’s a simple online  calculator that rudely awakened me.

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My son who admonished me to “stop calling it a tax cut until you run your numbers” … I finally did run my numbers.

For me — a discounted-rate college prof – my Federal income taxes will go up about 30%.

Whoa, Nelly.

What’s going on?

The key drivers: (1) loss of personal exemptions ($4,050 times 2)  (2) non-deductibility of state income taxes (Virginia has turned purple with a Dem governor) and (3) loss of 1/3 of my local real estate taxes (assuming the House version that still allows $10,000).

The alleged reduction in rates doesn’t offset those deductions lost.

Nuts.

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If you want to see what the likely impact will be on you, pull out the first couple of pages of your 2016 tax return so you can plug a few numbers into the CALCXML online tax calculator.

Here’s an example for a family of 4 – husband, wife, 2 kids under 18 … filing jointly … $150,000 combined income … no “unearned investment income” (dividends & capital gains which get taxed at a preferential rate) … $500,000 mortgage @ 4% …. $5,000 local real estate taxes .

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click for CalcXM’s online tax calculator

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And, the answer is …

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It’s time to do away with SALT.

October 26, 2017

That is, the State and Local Tax deduction.

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Among the provisions of the GOP’s tax-cutting plan that has drawn intense opposition (mostly from Democrats) is the elimination of state and local tax (SALT) deductions for folks who itemize their deductions (versus taking the standard deduction).

All else equal, eliminating the SALT deduction would income taxes paid to the federal government by about $180 billion each year … providing some wiggle room for cutting income taxes in other ways.

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So, why the uproar? Who gets hurt if the SALT deduction is eliminated?

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Taxes: The only thing to love about the AMT …

April 9, 2015

Just finished this year’s taxes.

One interesting twist ….

In 2012, like a lot of folks, I sold a bunch of stocks to beat Obama’s hike in the capital gains tax …  from 15% to 23.8% (including the 3.8% ObamaCare surcharge)

As a result, my state tax bill paid in 2013 was higher than usual … Virginia’s share of the capital gains.

At first I was delighted this year.

Why?

Because, on my Federal return,  I could deduct the higher-than-normal taxes that I paid to Virginia.

Unfortunately, the thrill was short-lived.

I’d forgotten about the AMT … you know, the Alternative Minimum Tax.

I’d forgotten, but TurboTax hadn’t.

Bottom line: My VA tax deduction got wiped away by the AMT calculation.

Like many folks, I had internalized that state income taxes are annoying, but no big deal since they get written off at the Federal level.

Not so if you’re among the millions of Americans who get snared in the AMT trap.

Oh, well.

At least there is one small delight I get from the AMT …

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Taxes: The only thing to love about the AMT …

March 5, 2014

Just finished this year’s taxes.

One interesting twist ….

In 2012, like a lot of folks, I sold a bunch of stocks to beat Obama’s hike in the capital gains tax …  from 15% to 23.8% (including the 3.8% ObamaCare surcharge)

As a result, my state tax bill paid in 2013 was higher than usual … Virginia’s share of the capital gains.

At first I was delighted this year.

Why?

Because, on my Federal return,  I could deduct the higher-than-normal taxes that I paid to Virginia.

Unfortunately, the thrill was short-lived.

I’d forgotten about the AMT … you know, the Alternative Minimum Tax.

I’d forgotten, but TurboTax hadn’t.

Bottom line: My VA tax deduction got wiped away by the AMT calculation.

Like many folks, I had internalized that state income taxes are annoying, but no big deal since they get written off at the Federal level.

Not so if you’re among the millions of Americans who get snared in the AMT trap.

Oh, well.

At least there is one small delight I get from the AMT …

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Gotcha: Here are the nasty 13 tax increases …

January 9, 2013

Here’s a great recap prepped by the Heritage Foundation with links to deeper details …

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Key takeaways:

  • Everybody is getting nicked … either directly or indirectly … not just the wealth-mongering 2%.
  • Biggest impact is elimination of the payroll tax holiday … which hurts the middle class the most

Read ‘em and weep …

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Encore: Those %#@! Bush Tax Cuts

December 21, 2012

This Homa FIles brief was originally posted July 23, 2008. It’s long, … loaded with with pivotal facts.

Since expiration of the Bush tax cuts looks increasingly likely, I thought they’re worth another look — just as background

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On the 2008 campaign trail, candidate Obama broad-brushed all of the Bush tax cuts as “for the wealthy”.

Now, OMB estimates that extending the Bush tax cuts in their entirety would cost $3.7 trillion over 10 years … of that amount over 80% goes to folks making less than $200,000 – $250,000 annually.

In other words, over 80% of the Bush tax cuts for the wealthy went to Obama-defined “non-wealthy” folks — some of whom pay income taxes, and many of whom don’t.

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Summary: We’ve all heard the rants about the cuts in the top bracket rate, capital gains rate, dividend taxes, and estate taxes.

But, when was the last time that your heard anybody mention the new 10% bracket, larger and refundable child and earned income credits, negative income taxes, elimination of the marriage tax penalty, or expanded college benefits?

Here are the details of the Bush tax cuts  …

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Why not separate business income on 1040s?

December 3, 2012

Given Obama’s obsession with increasing tax rates on the “millionaires & billionaires” making more that $250,000 … and, given the GOP’s rhetoric that they want to protect small businesses … I can’t figure out why they don’t just treat business income reported on 1040s differently than ordinary income.

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Specifically, in a prior post  we said:

  • Separate business income reported on 1040s from all other income … then cap the business income portion at 25% … allow losses to offset ordinary income.
  • Then, since Obama is obsessed with raising rates on “millionaires & billionaires” who make more than $250k, I  add some brackets with high rates for folks making more than $500,00, #1 million, etc

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A loyal Homa Files reader – who is a part-owner of a relatively small business — that will have his company hammered by Obama’s proposed tax rate change.

Here’s a paraphrase of his real life perspective:

“Personal income” should be just that, the take-home pay and revenue received by the individual worker and should exclude income listed on the K-1 in the personal tax return.

  • Note: Income from S-Corps, LPs, etc., is conveyed via K-1s.  The “corporate income tax” is, in effect, paid by the equity-holders and partners as personal income.

Example: Say an individual “earns” $250,000 and owns 5% of an S-Corp that earns $5MM

The individual gets allocated $250,000 (5% times $5 million) of the S-Corp’s earnings via a K-! … that $250,000 is rolled into the individual’s 1040 return.

  • Important: the individual didn’t get any cash from the S-Corp, just an allocation of earnings.

Having broken the magical $250,000 threshold, Obama’s tax scheme  would certify the individual as a “millionaire or billionaire” and jack up his tax rates to 39.6% … plus 3.8% in ObamaCare taxes since the income is “unearned”.

Think about that.

The highest corporate tax rate is 35% … the average corporate tax rate is much lower.  Think, GE’s zero-percent rate.

But, under Obama’s plan this small business owner gets slapped with a tax rate of over 44%.

Does that sound right to you?

To make matters worse, the individual didn’t get any cash … just an allocation of earnings.

To pay the tax bill, he has to reach into personal funds … which are probably limited since he’s thrown his dough into the company … or, the S-Corp will have to distribute dividends to partially cover the individual’s tax liability.

If the S-Corp pays out dividends to partially fund the owners’ tax liability, the company has less money to invest in the business.

Does that make any sense?

Thanks to ST for feeding the lead

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Buffett proposes his own “Buffett Rule” … we like our’s better.

November 27, 2012

Warren Buffet was back at it yesterday, venting his conscience by repping in an NYT op-ed for higher taxes on wealthy folks.

As part of his treatise, he argues that investors aren’t swayed by after-tax returns … pre-tax is what moves them.

Say, what?

Keep reading for his other thoughts and Ken’s proposed Buffett Rule …
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Per Simpson-Bowles … go ahead and limit the mortgage interest deduction.

November 16, 2012

Since I think Simpson-Bowles will be the template for the fiscal cliff resolution, I’ve been thinking about its provisions … starting with taxes (of course).

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Mortgage Interest Deduction

Currently, income tax payers who itemize are allowed to deduct mortgage interest subject to some liberal restrictions:

  • Mortgages for both primary and second homes are allowed up to a combined mortgage balance of $1 million
  • Home equity loans— up to $100,000 are allowed with some restrictions on use of the funds

Simpson-Bowles proposed that:

  • The mortgage deduction be eliminated and replaced by a non-refundable tax credit.
  • The non-refundable credit would be equal to the interest on a primary home mortgage up to $500,000
  • No credit would be provided for interest on second home mortgages and home equity loans

Let’s do an example.

Say somebody is holding $1 million in mortgages carrying a 5% interest rate … annual interest paid = $50,000.

  • Under current tax regs, the $50,000 is tax deductible … so, if the taxpayer is in the 35% bracket, the deduction is worth $17,500 in tax savings.
  • Under Simpson-Bowles, only $500,000 of the mortgage qualifies … the imputed  interest on the $500,000 is $25,000 … so, the tax payer – regardless of his tax bracket would get a $3,000 credit against his taxes (12% times $25,000 = $3,000)

On balance, I side with with Simpson-Bowles on this one.

In fact, I’d probably be even more aggressive and phase the mortgage interest tax advantage out entirely over, say, 10 years.

My basic logic: Why should home owners get a tax break that’s not available to the 35% of people who rent the place where they live?

Said differently, why should renters who pay income taxes subsidize my mortgage?

And, it’s hard to say, with a straight face, that vacation homes deserve a tax break.

So, I say: start the process of eliminating the mortgage interest deduction.

What do you say?

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Per Simpson-Bowles … go ahead, eliminate the deduction for state & local taxes.

November 15, 2012

Since I think Simpson-Bowles will be the template for the fiscal cliff resolution, I’ve been thinking about its provisions … starting with taxes (of course).

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State & Local Taxes

Currently, income tax payers who itemize are allowed to deduct state & local taxes.

Primarily, that includes state & local income taxes and local real estate taxes.

I benefit from both.

Still, I side with with Simpson-Bowles on this one.

My basic logic: Why should Federal income tax payers is relatively low tax & spend states (think FL, TX) be forced to subsidize folks in high tax & spend states (think CA, NY, NJ, MD, DC).

If a goal of tax reform is fairness … that’s not fair!

So, I say: eliminate the deduction for state & local taxes.

What do you say?

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Limit the home mortgage interest deduction … outrageous!

October 16, 2012

Not really … and, it might come up in tonite’s debate.

First, keep in mind that 2/3’s of tax filers take the standard deduction rather than itemizing deductions … so they’d be unaffected.

And, keep in mind the roughly 1/3 of folks rent the place they live … they don’t get a direct mortgage interest deduction … though, economists argue, they get an indirect deduction since their landlords get to deduct mortgage interest as a business expense. So, the playing field would be leveled for home owners and renters.

So, what about limiting the deduction for those folks who currently own a home and  itemize deductions?

Well, for openers, the home mortgage interest deduction is already limited … there’s already a  $1 million cap on the size of a family’s mortgages that qualify for the deduction … the cap is $500,000 for individuals filing separately.

Interest paid on second homes can be included in the deduction, subject to the caps.

Note that the deduction isn’t a direct cap on the amount of interest that can be deducted … it’s a cap on the size of the mortgage(s) … so, a max’ed out family with a $1,000,000 mortgage @ 6% gets to deduct $60,000 … a family with a $1 MM loan at 4% gets to deduct $40,000.

With that as background …

Tightening the limits on the home interest mortgage deduction would be a fairly simple thing to do …

Specifically, what I’d do if I were Mitt:  Slide the limit down to, say $500,000 – which is about double the median home value in the country … disallow mortgage interest on second homes … and do not raise the cap with inflation… that way, the nominal value of the deduction would stick around forever, but “real” value of the deduction would slowly vanish over time … without jolting the real estate market.

Presto.

BTW: I’d get hammered by this change … but still, I think it would be a right thing to do.

P.S.  As I’ve said before, I’m also in favor of axing the deduction for state & local taxes … if states want to tax high and spend much, that’s their perogative … but, let residents of those states foot the bills … don’t lay off the cost to those of us living in fically responsible staes.  This change would fly politically for Romney since the high tax & spend states are blue ones that won’t vote for him any way … in most red states, Mitt’s proposed rate reductions would offset the loss of the deductions.

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