Will Your Taxes Go Up? Find Out With These 8 Scenarios

With Republicans having inexplicably sacrificed a crucial Senate seat last night by choosing to support a candidate accused of multiple counts of pedophilia, it"s unclear whether tax reform is even a remote possibility at this point.  Certainly, the challenge of forming a consensus among the GOP was difficult enough when they held a 2-seat advantage in the Senate so we can only assume it will be next to impossible now that that lead has been cut in half. 

Of course, Republicans seem to have every intent of passing a tax bill before Doug Jones gets seated in January...but, then again, they"ve missed almost every deadline they"ve set for themselves since Trump moved into the White House nearly a full year ago.

Be that as it may, just in case a bill gets passed at some point before winter break, Bloomberg, along with a little help from Baird Private Wealth Management, has put together a series of 8 tables which help to quantify exactly how you may be impacted by tax reform whether you"re a "millionaire, billionaire, private jet owner" living in Manhattan or an "average Joe" making $40k a year and renting an apartment in Milwaukee.  Here they are:

Scenario 1 - Manhattan Millionaires: These Manhattan residents have a jumbo mortgage (at an assumed 4 percent interest rate) and take a $40,000 deduction on mortgage interest; pay property taxes of $96,250 and state income tax of $135,360; and make annual charitable contributions totaling $100,000.

Unfortunately, contrary to what you might hear from Nancy Pelosi, these folks take a hit under both the House and Senate tax bill primarily due to the loss of the SALT deductions.

Scenario 2 - Malibu Millionaires:  A married couple has a primary residence in Malibu, California, and a second home in Lake Tahoe. The property tax on the Malibu home is $15,860, and $4,896 on their second home; they deduct $40,000 total in mortgage interest for the two homes; and give $50,000 to charity.

Scenario 3 - Small Business Owner:  This married couple with a small manufacturing business in Pittsburgh, Pennsylvania, has $300,000 in pass-through business income. Their deductible mortgage interest adds up to $6,000; their property tax is $8,600; and they give 5 percent of their income to charity.

Scenario 4 - Suburban Family:  A married couple in a New York City suburb has estimated state income tax of $17,290; their annual mortgage interest deduction is $14,000; and they pay property tax of $13,750 -- about the same amount they donate to charity.

Scenario 5 - Single Secretary In Manhattan: This New York City renter pays estimated state income tax of $8,148 and gives about $6,500 to charity.

Scenario 6 - Married Family In Austin:  This young couple rents and has income of $100,000. They give $5,000 a year to charity.

Scenario 7 - Median Income Couple In Portland:  This Portland, Oregon, couple earns close to the median household income for the U.S. Their property tax bill is $1,688; their deductible mortgage interest is $3,000; and estimated state income tax is $4,744.

Scenario 8 - Median Income Family In Milwaukee:  This married couple rents and has an estimated 2017 state income tax bill of $2,104.

Of course, this will all change when/if the GOP submits a final tax bill for consideration...but, like Obamacare, you may only find out how it truly impacts you after it has already been passed.

Here Are The Negatives In The Republican Tax Plan, According To Wall Street

Judging by the market"s euphoric reaction this morning, the Senate"s passage of the tax bill on Saturday is nothing but good news for stocks (well, maybe not the Nasdaq). And indeed, banks - whose effective tax rate is around 30% - and other tax-sensitive companies are surging, with banks are outperforming and  sending the KBW bank index up as much as 2.8% to a fresh decade-high (BofA up as much as 3.9% to the highest since Oct. 2008; JPM up as much as 3.4% to record high; Citigroup up as much as 2.7% to highest since Dec. 2008). Even so, as Bloomberg reports, some analysts are sounding a few warnings. Their concerns include: a delay in potential benefits; the need to make fixes in a highly partisan environment; and curbing R&D credits.

Here are the negatives in the Republican tax plan, according to Wall Street:

WELLS FARGO (Christopher Harvey)

• Sees difference between House, Senate timing of corporate tax cut (2018 vs 2019) as significant, with Senate’s 2019 likely to prevail; that means tax overhaul’s potential direct impact to 2018 corporate earnings is likely to be zero


• Feels "great rotation" (out of tech, and into tax-sensitive issues such as banks, small-caps, value-oriented stocks) will need to pause


• Senate’s depreciation policy may counterbalance timing of the corporate tax cut to a degree; notes Senate allows for full expensing of capital investments starting in 2018; in a higher tax environment (no change until 2019), that may pull some spending forward, aiding 2018 growth; also sees strong 1H M&A

COMPASS POINT (Isaac Boltansky)

• A "concerning theme" is emerging: the likely need for fixes next year, while "it isn’t exactly clear how those changes will be made"


• Structural defects in final bill are probable, given it’s being drafted at "warp speed," and most pieces of sweeping legislation require technical corrections; recently, however, lawmakers have been unable to reopen primarily partisan bills (like Dodd Frank, ACA)


• Sees conference committee process as potentially volatile, but expects quick movement, with Trump signing a bill this year

BLOOMBERG INTELLIGENCE (Andrew Silverman)

• Downsides include AMT inclusion, which haircuts or prevents some businesses from being able to take deductions and depreciation (including the R&D credit, which GOP had said they wanted to preserve)


• Also notes slashing state and local tax (SALT) deduction; higher-than-est. repatriation rates (bad for tech, pharma cos.); haircut on taking net operating losses


• Senate bill changes how non-profits and pensions are taxed, likely increases taxes substantially on "unrelated business taxable income"

HORIZON INVESTMENTS (Greg Valliere)

• House/Senate conferees, who will start work on Monday, have "enormous number" of issues to resolve, including whether individual provisions are permanent, whether mortgage deduction will get haircut, when corporate rate cuts begin (2018 or 2019?)


• Veteran tax lobbyists were "incredulous" this weekend over Senate-passed tax bill, which was "hastily patched together with enormous unintended consequences," including retaining corporate AMT, which effectively would kill the R&D tax credit


• Adds bill is still being written and corrected; numbers don’t add up; Republican leaders, led by Paul Ryan, "have made no secret about their next goal," which is major overhaul of the welfare state, including curb growth of Social Security, Medicare, Medicaid as deficits rise; "Democrats, eyeing the next two elections, are salivating"

MOODY’S (Nick Samuels)

• Senate’s overhaul is negative for state and local government finances (most sharply in high-tax states like Calif., N.Y., N.J.)


• Change to SALT deduction would reduce disposable income for many taxpayers, likely outweighing positive effect of lower federal rates on consumption


• SALT change would also hurt financial flexibility by increasing political resistance to tax increases at state, local level

MOODY’S (Christina Padgett)

• Diminished interest deductibility, which is more punitive to highly-leveraged companies, is likely to have negative implications for low-rated speculative grade cos., may outweigh benefits of lower corporate tax rate


• Spec-grade companies pay relatively little in taxes in part due to tax shield from interest deduction


• Leveraged buyouts and industry sectors with highest leverage, weakest coverage of interest expense are among most vulnerable

HEIGHT SECURITIES (Ed Groshans)

• Senate-passed bill amends tax law covering interest deductions on home equity indebtedness


• This "seemingly innocuous" amendment would prevent homeowners from deducting interest on mortgages that are refinanced


• Would likely reduce refinancings for borrowers who’d prefer to maintain mortgage interest deduction for tax purposes

MELIUS (Carter Copeland)

• While tax overhaul may bring some extra profits to defense co. bottom lines and cash flow to shareholders, it may also make the future budget situation much tighter for the Department of Defense by removing "wiggle room in the annual fight for funding"

Source: Bloomberg

Stocks Tumble On News Senate Tax Plan To Delay Corporate Tax Cut Until 2019

Confirming reports from earlier this week that the Senate GOP tax plan would delay the corporate tax cut for (at least) one year, a move that would strip the proposed tax reform of its most potent benefit, moments ago the Wapo reported that in a few hours, Senate Republicans will propose delaying a cut in the corporate tax rate from 35 percent to 20 percent until 2019. Bloomberg confirmed the news, quoting Bill Cassidy who said in an interview that that Senate Finance Committee tax legislation proposal will include a one-year delay before cutting the corporate tax rate to 20%.

The compromise would be a major departure from President Trump’s insistence on immediate changes that he says "are necessary to spur the economy." And while some Senate Republicans objected to the one year delay, they were overruled.

As Bloomberg adds, the Senate tax writers will also propose keeping number of individual income-tax brackets at seven in a departure from the House bill that condenses the number to four, Sen. Bill Cassidy tells reporters. Cassidy also says Senate proposal won’t keep top rate at 39.6%, though doesn’t state what new top individual rate would be

In an attempt to offset the delayed economic boost from excess corporate spending, the WaPo explains that to prevent companies from waiting until 2019 to invest, "Senate Republicans will propose to allow companies to immediately deduct all capital investments in 2018 to incentivize them to spend more money immediately, the people said."

The reason for the delay is simple: there is not enough revenue. "The one-year delay would lower the cost of the tax cut bill by more than $100 billion, and negotiators are trying to preserve as much revenue as they can for other changes." The revision could also delay decisions by companies to move back to the United States from overseas or have companies hold off on other decisions as they wait for the corporate rate to fall.

As we have explained previously, the Senate approach is different than House Republicans are taking as it is limited by practical considerations: while the House is advancing a bill that would lower the corporate tax rate in 2018, they are also having problems dealing with the total cost of their bill, which has ballooned beyond the $1.5 trillion price tag they were permitted under budget rules.

And while Treasury Secretary Steven Mnuchin told Bloomberg yesterday that the White House’s “strong preference” would be for the tax cut to go into effect next year, the White House is not expected to threaten blocking the bill over this change.

In other words, despite the various teasers how the 1 year delay is immaterial, the biggest boost to the economy from the Senate"s tax bill is about to be eliminated. The result was immediate, with stocks dumping and the VIX spiking.

GOP Tax Plan "Talking Point" Highlights Released

Moments ago, the GOP released the "talking point" highlights of the republican tax plan which, as previewed earlier this morning, will keep the 20% corporate tax cut as permanent, and which allegedly will assure that a family of 4 making $59,000 will get a $1,182 tax cut.

As discussed previously, the bill keeps a top rate of 39.6% for the highest-earners and doubles the standard deduction for middle class families. It expands the child tax credit to $1,600 from $1,000 and will not make any changes to the 401(k) plans. The bill also “makes no changes to the popular retirement savings options that Americans have today — including 401(k)’s and Individual Retirement Accounts, or I.R.A.s. Americans will be able to continuing making both traditional, pretax contributions and ‘Roth’ contributions in the way that works best for them.”

So far so good; where there will be problems however, is that the bill also includes the repeal of an itemized deduction for medical expenses, a key provision for households with extraordinary health-care costs. It also repeals the tax credit for adoption and the deduction of student-loan interest. The bill also limits the home mortgage interest deduction: for new home purchases interest would be deductible only on loans up to $500,000, down from $1 million, although existing loans would be grandfathered.

A key issue will be the treatment of the state and local tax deduction, which lawmakers are proposing to cap at $10,000. That will not be enough for Republicans in some high-tax states, where middle-class families make heavy use of the deduction. As the NYT notes, "the compromise, as it had been sketched out this week, would preserve the deduction for property taxes, but not for state and local income taxes, and it appeared as if there would be a cap on the deduction. But at first glance, it did not appear as if that was enough to win over all of the New York and New Jersey members."

Here are the most notable changes:

• Lowers individual tax rates for low- and middle-income Americans to Zero, 12%, 25%, and 35%; keeps tax rate for those making over $1 million at 39.6%


• Increases the standard deduction  from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples.


• Establishing a new Family Credit, which includes expanding the Child Tax Credit from $1,000 to $1,600


• Preserving the Child and Dependent Care Tax Credit


• Preserves the Earned Income Tax Credit


• Preserves the home mortgage interest deduction for existing mortgages and maintains the home mortgage interest deduction for newly purchased homes up to $500,000, half the current $1,000,000


• Continues to allow people to write off the cost of state and local property taxes up to $10,000


• Retains popular retirement savings options such as 401(k)s and Individual Retirement Accounts


• Repeals the Alternative Minimum Tax


• Lowers the corporate tax rate to 20% – down from 35%


• Reduces the tax rate on business income to no more than 25%


• Establishes strong safeguards to distinguish between individual wage income and “pass-through” business income 


• Allows businesses to immediately write off the full cost of new equipment


• Retains the low-income housing tax credit

A visual summary of the new tax brackets:

And the full document:

Stocks, Bond Yields Tumble On Disappointing "Gradual" Tax Cut Headlines

Having continued Friday"s melt-up as soon as US equity markets opened this morning, headlines from Washington that the corporate tax cuts may be enacted "gradually" reaching 20% in 2022.

As Bloomberg reports, House tax writers are discussing a gradual phase-in for the corporate tax-rate cut that President Donald Trump and Republican leaders want -- a schedule that would have the rate reach 20 percent in 2022, according to a member of the chamber’s tax-writing committee and a person familiar with the discussions.

The phase-in plan has been considered, but may not yet be final, said a member of the House Ways and Means Committee, who asked not to be named because the discussions are private.

Under that plan, the rate may be reduced from its current 35 percent rate by three percentage points a year starting in 2018.

This is clearly not what the "Veruca Salt" market demands... "I want it all.. and I want it now."

This follows the SALT elimination over the weekend. As Bloomberg reports, bowing to concerns from Republican House members in high-tax states, the chamber’s chief tax writer said he’ll preserve a federal income-tax break for property taxes.

“At the urging of lawmakers, we are restoring an itemized property tax deduction to help taxpayers with local tax burdens,” House Ways and Means Chairman Kevin Brady said in a statement Saturday afternoon.

The announcement was welcomed by Representative Chris Collins, a New York Republican, who said the compromise would address the need “to protect middle income working families” in states like his own. He predicted it would assuage Republicans’ concerns.

And that sent stocks lower...

 

Even FANG Stocks are rolling over...

 

And 10Y Yields are at one week lows...

Realtors Warn Of "Another Housing Crash" If Mortgage Tax Deductions Are Scrapped

After failing miserably if their efforts to repeal and replace Obamacare, Republicans are set to shift their legislative agenda to focus on tax reform when they get back from their generous month-long August recess (taxpayers are such great employers).  Among other things, proposed changes to the personal tax code would include eliminating nearly all tax write-offs, including those for state and local taxes, and instead doubling the standard deduction.

Of course, potentially no industry would be more impacted by such a move as the housing market which has sparked a slight panic at the National Association of Realtors (NAR).  As Reuters points out this morning, roughly 30 million taxpayers taxpayers claim mortgage interest deductions totaling some $70 billion each year which provides a huge incentive to own a home.   

The National Association of Realtors issued an "August Recess Talking Points" circular imploring members to remind lawmakers that "Homeowners must be treated fairly in tax reform" to avoid "another housing crash."

The group cited a report it commissioned from PwC that estimated home values could quickly dive more than 10 percent if the tax plan becomes law.

Currently, about 30 million taxpayers claim the mortgage interest deduction, with about $70 billion in total claims, according to Robert Dietz, an economist with the National Association of Homebuilders.

Estimates suggest more than half of taxpayers would stop itemizing under the proposed plan, Dietz said, warning that this would create a large ripple effect through the economy. He said people in early years of a mortgage would suffer most, along with prospective home buyers.

Meanwhile, talking points distributed by NAR, intended to give realtors around the country ammunition against their elected officials while they"re "vacationing" in their districts, warns that tampering with the mortgage deduction could cause "home values everywhere to plunge" resulting in many homeowners once again going "under water" on their primary asset.

-  Proposals limiting tax incentives for homeownership would cause home values everywhere to plunge. Estimates provided by PwC show that values could fall in the short run by more than 10 percent if a Blueprint-like tax reform plan were enacted. The drop could be even larger in high-cost areas.   It may take years for home values to rebound from such a significant decrease.

-  With a reduction in values of this size, homeowners with relatively small amounts of equity would again see their mortgages go under water, finding they owe more than what their home is worth. For many, this will lead to defaults, foreclosures, or short sales, creating havoc for families, neighborhoods and communities.

-  The home is the most valuable asset for most owners. Millions of families have built equity for years with the hope of using it to help pay for retirement or college for children. Many of these dreams would evaporate.

But it"s not just the housing market that would be impacted as the CEO of the American Red Cross warned that removing charitable deductions would be "devastating" for non-profit organizations that currently collect some $13 billion worth of tax-deductible donations annually.

Charitable organizations are not arguing against increasing the standard deduction. But they are asking members of Congress to consider creating a “universal deduction,” so taxpayers taking the standard deduction can get additional credit for donations without itemizing.

Taxpayers claim an estimated $13 billion each year in charitable deductions. Charities fear giving would plummet if the standard deduction were doubled without creating a universal deduction.

Gail McGovern, president and CEO of the American Red Cross, said reducing charitable deductions would be “devastating.”

But it"s probably no "yuge" deal...the U.S. housing stock is only worth about $30 trillion so we"re sure the homebuilders and lenders can absorb a small $3 trillion valuation loss, right?

Mass Exodus From High-Taxes - Which States Did Americans Leave In 2016?

Submitted by Johnny Kampis via The Foundation for Economic Education,

Migration patterns for 2016 show that Americans tended to move away from high-tax states and into states where residents keep more of what they earn.

United Van Lines, the nation’s largest moving company, recently released its annual movers study report showing that South Dakota overtook Oregon as the top inbound destination. Generally, more people moved toward the West, and states in the Northeast saw the largest exodus of residents. The top four outbound states in 2016, in order, were New Jersey, Illinois, New York, and Connecticut.

(Photo: Tax Foundation)

The Tax Foundation pointed out in a recent blog post that those results are similar to the organization’s annual state business tax climate index.

In fact, New Jersey, which saw an outbound rate of 63 percent—meaning nearly two people moved out of the Garden State for every person who moved in, also finished last in that index. New York had the second-worst business tax climate, according to the Tax Foundation. Connecticut was eighth-worst while Illinois was more middle of the pack.

The Tax Foundation said the absence of a major tax such as the corporate income tax, individual income tax, or sales tax is a common factor among most of the states that rank in the top 10 on the business climate tax index.

Nicole Kaeding, author of the migration post, noted that taxes are sometimes overcited as a primary reason why people move out of states, but they certainly can play a significant role, as is evidenced by the similar results in the Tax Foundation and United Van Lines studies.

“Tax rates and structure affect a state’s economy,” she wrote.

“States with less burdensome tax structures and lower rates tend to have better economic growth. Increased job opportunities can result from the better economic growth.”

She noted, for example, a person moving to Chicago for a job might decide to commute from nearby Indiana where the individual income tax rate is 3.3 percent, rather than live in Illinois, where the same rate is 3.75 percent.