A Guide to the Tax Changes

[Conan]

I do not itemize, I pay the amt. My income is from dividends, capital gain distributions, iras, annuities etc. some are from bonds, but not much.

Capital gain distributions don't trigger AMT but you're right it's possible to take the standard deduction and still pay AMT. Here's an article, assuming it gets the numbers right, saying for 2018 you need to be married and have AGI in the $290K-$765K range to be in that position.

The Senate Would Keep The Individual AMT, But Turn It Into A Very Different Tax
http://www.taxpolicycenter.org/taxvox/senate-would-keep-individual-amt-turn-it-very-different-tax
With about 90 percent of preferences eliminated from the regular tax, why would anyone pay the AMT? The answer: Because the Senate bill slashes individual income tax rates so much that all married couples with ordinary income between $290,000 and $765,000 would owe AMT even if they only claimed the standard deduction. In this simplest case, nobody with income outside this range would owe AMT. It turns out that single filers would be spared (because the Senate bill cuts tax rates more for high-income married couples than for singles), but they make up only about 10 percent of tax units in the affected income range.

 

[VacationForever]

The high tax states CA,NY, and NJ do not get back as much per dollar on their tax dollars than the low tax states. I do not live in a high tax state but that seems unfair also. They would argue that they pay more than their fair share.

Here is the problem... we are trying to mix federal taxes with state taxes. State taxes do not flow to the federal government and hence the federal taxes really do not need to give any deductions/breaks for state taxes paid. We paid alot of taxes in California and we did not like how the tax dollars were spent and hence we moved. Where we live now is alot safer, lower homeless population and lower crime.

We had dinner with a couple last night and they commute back to Calfornia regularly to see their kids and grandkids. We have not done the comparsion but they said CA gasoline is 73 cents per gallon more expensive and yet the roads are more broken. California has high taxes and that is the price one pays to live there. The weather cannot be beaten. We have been to NY 3 times, the first 2 times we really enjoyed and the 3rd time which was in March 2017, and we really did not want to go back anymore. Many of the streets were filthy and smelly, and saw many homeless people. One has to wonder why are high tax states having more issues with infrastructure, cleanliness, crime and homelessness than the low or no tax states. Where we live now, everything feels right as can be in the US.

 

[CalGalTraveler]

The people in my example didn't pay AMT in 2017 because they live in a no income tax state (and they don't have fancy tax preference items).

The 2018 tax law keeps the AMT on paper, but limiting everyone's state and local tax deduction to $10,000 eliminates AMT for most regular people. You can think of the new law as "AMT-for-all," since the AMT for most of us who pay it works by taking away your state and local tax deductions and your personal exemptions. The new regular tax addresses that directly.

That's an interesting perspective. So how would $5000 in AMT paid that are now eliminated compare to $25,000 in lost property and state tax write-offs? Would taxes be lower? equal or pay more?

 

[Brett]

I'm curious. What do the high tax states do with all the money? I live in Texas (no State Income tax; Property taxes on a $200,000 house less than $4,000; and a 8.25% Sales Tax) and we seem to get along just fine. One negative is recen increase in toll roads. But the money generated from taxes in high tax states must go somewhere.

George

you can easily google the budgets of high tax states - CA, Oregon, NY, etc. to find out "where the money goes"
Obviously if a state had low sales tax, low income tax and low property taxes and great pensions we'd all move there
(except for Alaska)

 

[Nickfromct]

.

 

[CalGalTraveler]

you can easily google the budgets of high tax states - CA, Oregon, NY, etc. to find out "where the money goes"
Obviously if a state had low sales tax, low income tax and low property taxes and great pensions we'd all move there
(except for Alaska)

I would like to see an comparative analysis of this if anyone could find one to share. It would be nice to see if this reform incents these states to lower taxes (pigs will fly) or at least put a cap on it. FWIW...California will soon be reaping pot profits which could offset some taxes.

If the states do nothing about their taxes, and with an aging population who is already inclined to downsize, this may go down in history as one of the great U.S. migrations similar to the drive west and the dust bowl. Californians/New Yorkers/New Jersey etc. will have great incentive to move to the low tax states. The low tax states will inherit a large increase in population with all of the inflation of costs, "woes", norms etc. and this will drastically change the composition of those states for better or for worse.

 

[bluehende]

Here is the problem... we are trying to mix federal taxes with state taxes. State taxes do not flow to the federal government and hence the federal taxes really do not need to give any deductions/breaks for state taxes paid. We paid alot of taxes in California and we did not like how the tax dollars were spent and hence we moved. Where we live now is alot safer, lower homeless population and lower crime.

We had dinner with a couple last night and they commute back to Calfornia regularly to see their kids and grandkids. We have not done the comparsion but they said CA gasoline is 73 cents per gallon more expensive and yet the roads are more broken. California has high taxes and that is the price one pays to live there. The weather cannot be beaten. We have been to NY 3 times, the first 2 times we really enjoyed and the 3rd time which was in March 2017, and we really did not want to go back anymore. Many of the streets were filthy and smelly, and saw many homeless people. One has to wonder why are high tax states having more issues with infrastructure, cleanliness, crime and homelessness than the low or no tax states. Where we live now, everything feels right as can be in the US.

If I answer this we will be breaking the no politics rule here. No one likes taxes. It is my observation though that tax breaks others get are totally unfair, while the ones I get are essential to life seems to be a common attitude.

 

[rapmarks]

That's an interesting perspective. So how would $5000 in AMT paid that are now eliminated compare to $25,000 in lost property and state tax write-offs? Would taxes be lower? equal or pay more?

I bet thy would pay the amt in 2017, it wasn't included in the example

 

[Nickfromct]

If I answer this we will be breaking the no politics rule here. No one likes taxes. It is my observation though that tax breaks others get are totally unfair, while the ones I get are essential to life seems to be a common attitude.

If I’m not mistaken, the AMT occurs because certain deductions are disallowed after you make a certain level of earnings. I believe some of the SALT deductions are included in the AMT calcs. So if these expenses are capped, then the AMT should be reduced.

 

[Conan]

I bet thy would pay the amt in 2017, it wasn't included in the example

I went back and used 2017 Turbotax to refine the example on the prior page. There is some AMT in 2017 but the total taxes I had before are about the same.

 

[VacationForever]

I would like to see an comparative analysis of this if anyone could find one to share. It would be nice to see if this reform incents these states to lower taxes (pigs will fly) or at least put a cap on it. FWIW...California will soon be reaping pot profits which could offset some taxes.

If the states do nothing about their taxes, and with an aging population who is already inclined to downsize, this may go down in history as one of the great U.S. migrations similar to the drive west and the dust bowl. Californians/New Yorkers/New Jersey etc. will have great incentive to move to the low tax states. The low tax states will inherit a large increase in population with all of the inflation of costs, "woes", norms etc. and this will drastically change the composition of those states for better or for worse.

So true... we meet so many people/retirees here in our development, they are mostly transplants from California and New York. Some even buy homes here and relocate their families while they still have businesses in New York. They simply fly back and forth through the year. I suspect that they do that to show residency here which means no taxes on their investments at the state level, while they still pay taxes for their income from California/New York. There is one family with a young boy and he goes to school here while his father has his business in New York. Again, with lower crime rate and a more pleasant environment, they feel that it is better to raise their son here.

 

[taterhed]

There are currently efforts seeking sponsorship to shift state tax deductions to the employer side of the deductions (net zero for the employer) to reduce the SALT impact in some states.

Be an interesting year....

 

[CalGalTraveler]

On the positive side: For business owners the pass-thru provision looks quite lucrative. Even as a service business you can be taxes at the 20% rate if if you can keep your income under the thresholds below.

“If you are a specified service business and your taxable income exceed the threshold amount plus the phase in range ($207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly), then you lose the deduction completely. In that case, the old pass-through rules apply meaning you pay tax using your individual tax rate.”

New York Times (more readable)
https://www.nytimes.com/interactive/2017/12/20/us/politics/small-business-tax-cut-pass-throughs.html

(technical article)
https://www.forbes.com/sites/kellyp...usinesses-pass-through-entities/#fe42056de33a


Implications? IMO

• More employees are going to push to become pass-thru freelancers so they can get the 20% rate. However they will need to find affordable healthcare to make it financially feasible.

• it appears that many professional service providers (lawyers, consultants etc.) will have incentive to move into semi-retirement to stay under the thresholds at 20% (and move to lower tax states).

 

[CalGalTraveler]

It now appears that states are scrambling to outmaneuver the new SALT deduction cap. I am reading that California is reported to be introducing a state bill this week that creates a state 501c3 charity which enables taxpayers to donate their property taxes to the newly created state foundation in order to get the full charitable write-off or you can pay your state taxes as usual (against the federal cap). They claim that a number of states including Florida and South Carolina do this already. No mention of cutting budgets...

https://www.mercurynews.com/2018/01...maneuver-a-new-federal-cap-on-tax-deductions/

 

[taterhed]

It now appears that states are scrambling to outmaneuver the new SALT deduction cap. I am reading that California is reported to be introducing a state bill this week that creates a state 501c3 charity which enables taxpayers to donate their property taxes to the newly created state foundation in order to get the full charitable write-off or you can pay your state taxes as usual (against the federal cap). They claim that a number of states including Florida and South Carolina do this already. No mention of cutting budgets...

I saw this along with the consideration for shifting state taxes to the employer side of the ledger....but I simply couldn't post the 'charitable contribution' aspect with (laughing) and falling off my chair.

 

[WinniWoman]

Here is the problem... we are trying to mix federal taxes with state taxes. State taxes do not flow to the federal government and hence the federal taxes really do not need to give any deductions/breaks for state taxes paid. We paid alot of taxes in California and we did not like how the tax dollars were spent and hence we moved. Where we live now is alot safer, lower homeless population and lower crime.

We had dinner with a couple last night and they commute back to Calfornia regularly to see their kids and grandkids. We have not done the comparsion but they said CA gasoline is 73 cents per gallon more expensive and yet the roads are more broken. California has high taxes and that is the price one pays to live there. The weather cannot be beaten. We have been to NY 3 times, the first 2 times we really enjoyed and the 3rd time which was in March 2017, and we really did not want to go back anymore. Many of the streets were filthy and smelly, and saw many homeless people. One has to wonder why are high tax states having more issues with infrastructure, cleanliness, crime and homelessness than the low or no tax states. Where we live now, everything feels right as can be in the US.

I'll tell you where they go in NY. Our property taxes go to Medicaid, Welfare, Highway dept. The school taxes just about surpass the property taxes.
A lot of both goes to salaries and pensions and health insurance. You need a third income just to afford the two of those, never mind what you pay in state and local from your pay and when you file.

NY is a welfare state that welcomes all to fleece the system. Come on in- we have a program for everything.

Meanwhile, our roads are crap and homeowners cannot afford these taxes any longer. That is why there are so many foreclosed homes up our way.

 

[VacationForever]

I'll tell you where they go in NY. Our property taxes go to Medicaid, Welfare, Highway dept. The school taxes just about surpass the property taxes.
A lot of both goes to salaries and pensions and health insurance. You need a third income just to afford the two of those, never mind what you pay in state and local from your pay and when you file.

NY is a welfare state that welcomes all to fleece the system. Come on in- we have a program for everything.

Meanwhile, our roads are crap and homeowners cannot afford these taxes any longer. That is why there are so many foreclosed homes up our way.

... and CA is very similar in terms of use of taxes.

 

[CalGalTraveler]

and Calif is expected to add $5 Billion to the Calif economy of taxable revenue to the coffers from the newly legalized marijuana industry...

 

[isisdave]

... and CA is very similar in terms of use of taxes.

Not really. In California, education costs are paid from state funds, while in many Eastern states, they are paid from a local school tax which is placed against property values, and is frequently MORE than either state income tax or other (usually county) property taxes, which pay for fire and police, road maintenance, jail, public welfare, possibly an airport, etc.

The state-funded education model was supposed to make public education more equal by providing the same number of dollars per student (although providing education has different costs in different localities). I used to live in New York, and have friends in New Jersey who report that a school budget usually has to be approved by voters, and that this is VERY difficult when school taxes on a $200,000 house might be $10,000. As I recall, if the voters won't pass the budget, then an "austerity" budget was imposed, which basically meant a very minimal school year without much in the way of enrichment or extracurriculars.

Neither system seems ideal to me, but the "Eastern" system seems a lot more stressful.

 

[Talent312]

Obviously if a state had low sales tax, low income tax and low property taxes and great pensions we'd all move there...

That sounds a lot like Florida, but don't move here.

"Most of the people who retire in Florida are wrinkled and they lean on a crutch.
And mobile homes are smotherin' my Keys. I hate those bastards so much."
-- Jimmy Buffett, "Migration" (1974)

.

 

[WinniWoman]

Not really. In California, education costs are paid from state funds, while in many Eastern states, they are paid from a local school tax which is placed against property values, and is frequently MORE than either state income tax or other (usually county) property taxes, which pay for fire and police, road maintenance, jail, public welfare, possibly an airport, etc.

The state-funded education model was supposed to make public education more equal by providing the same number of dollars per student (although providing education has different costs in different localities). I used to live in New York, and have friends in New Jersey who report that a school budget usually has to be approved by voters, and that this is VERY difficult when school taxes on a $200,000 house might be $10,000. As I recall, if the voters won't pass the budget, then an "austerity" budget was imposed, which basically meant a very minimal school year without much in the way of enrichment or extracurriculars.

Neither system seems ideal to me, but the "Eastern" system seems a lot more stressful.

And just live in a rural, but populated area like ours where most of the people work for the school system or local government - the biggest employers in the counties- and guess how they vote? The rest of us don’t have a chance.

 

[bobpark56]

We live in a resort town where the population doubles in the summer.

There are ocean front houses that are usually empty with property tax of $20,000 to $50,000 per year. When those owners deduct those taxes, others pay more to make up for it.

The same is true for low tax states. Those residents pay a higher federal tax because residents in high tax states are not paying their fair share because of deductions.

This gets to the heart of the issue. Permitting people to deduct state and local taxes subsidizes taxpayers in states with the highest tax rates, at the cost of higher federal tax rates for us all. This in turn encourages governments in those states to continue to spend more per capita than governments in more efficiently managed states. Reducing/eliminating the indirect tax subsidies should incentivize state and local governments to be more efficient (i.e., reduce spending)...else the politicians will be hearing about it from their voters.

 

[rickandcindy23]

Our property taxes are very low in Colorado, but the counties re-assessed this year, and we are expecting at least 1/3 higher taxes for next year. Still, it will probably be less than $2,500 for our house. We live in a very average house.

 

[rickandcindy23]

Tax rates in 1930 were much higher. We have never seen rates as high as in the 30's and 40's.

The economy boomed, growing by 59 percent between 1921 and 1929. In 1930, Herbert Hoover raised tax rates from 25 percent to a maximum of 63 percent, and Franklin Roosevelt boosted them to 79 percent later in the decade.

The 1940 top federal tax rate on regular income was 81.1% while the rate on capital gains was 30%.

In 1944-45, “the most progressive tax years in U.S. history,” the 94% rate applied to any income above $200,000 ($2.4 million in 2009 dollars, given inflation). In World War Two, tax law revisions increased the numbers of “those paying some income taxes” from 7% of the U.S. population (1940) to 64% by 1944.

 

[TUGBrian]

I think its important to note that most things being argued (both for and against) are for those of us who itemize our returns, and ignores the fact that the overwhelming majority of tax filing american households do not itemize, and instead take the standard deduction each year.