Republicans in Congress reconciled their different versions of the tax reform and offered their final version of the so-called Tax Cuts and Jobs Act today. Congress will vote on the final version next week, which is only slightly more favorable than the initial House of Representatives bill but still highly detrimental for most of California’s coastal housing markets. Below are some relevant details.
Changes in the standard deduction:
Current: A $6,350 standard deduction for single taxpayers and $12,700 for married couples filing jointly.
Proposed: A $12,000 standard deduction for single taxpayers and $24,000 for married couples filing jointly.
Individual tax rates would be adjusted as follows:
10 percent: $0 to $9,525 of taxable income for an individual; $0 to $19,050 for married joint filers
12 percent: $9,526 to $38,700 individual; $19,051 to $77,400 joint
22 percent: $38,701 to $70,000 individual; $77,401 to $165,000 joint
24 percent: $70,001 to $160,000 individual; $165,001 to $315,000 joint
32 percent: $160,001 to $200,000 individual; $315,001 to $400,000 joint
35 percent: $200,001 to $500,000 individual; $400,001 to $600,000 joint
37 percent: More than $500,000 individual; more than $600,000 joint
Corporate taxes would be reduced from 35 percent to 21 percent with other favorable deductions for businesses.
Current: Pass-through businesses — which include partnerships, limited liability companies, S corporations, and sole proprietorships — pass their income to their owners, who pay tax at their individual rates.
Proposed: Owners could apply a 20 percent deduction to their business income, subject to limits that would begin at $315,000 for married couples.
Estate tax exemption doubled to $11 million for individuals and $22 million for couples.
Child tax credit doubled to $2,000 for each child under 18 through 2024. Raise the phase-out amount to $500,000 and cap the refundable portion at $1,400 in 2018.
Housing-Related Tax Changes
Deduction of state and local taxes would be capped at $10,000, which include state and local property, income, and sales taxes. This is horrible news for Bay Area homeowners, since property taxes alone add up to more than $10,000. State and local income tax deductions, which average $16,000 for California filers who take the deduction, are thus effectively eliminated.
The mortgage-interest deduction would be capped at $750,000, which is slightly better than the House’s proposed $500,000 but down from the current $1 million. However, the deduction would be allowed on first and second homes. The $250,000 difference means about $10,000 less in mortgage-interest deductions in the first year of amortization
In total, a new buyer would lose about $25,000 in deductions in the first year of purchasing a home priced around $1.2 million. The impact is disproportionately more harmful to new homebuyers than existing owners.
Lastly, the final version repeals Obamacare’s individual mandate, but it retains a deduction for medical expenses and an exemption for graduate-school tuition waivers — a positive point for research universities and graduate students who live on assistant funds.
Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.