Earlier this year, the House and Senate passed respective versions of a major tax reform bill designed to streamline the U.S. Tax Code. As the GOP works to reconcile both proposals into a unified tax plan, aiming to send a tax bill to President Donald Trump’s desk by Christmas, speculation about the final bill’s contents is intensifying among taxpayers, political analysts, professors, tax attorneys, and others. In particular, there has been some pushback from CPAs concerning proposed changes to the mortgage interest deduction, which could affect millions of homeowners in California and throughout the country.
The home mortgage interest deduction (MID) has proven a popular feature of the U.S. Tax Code. In its present form, the MID allows taxpayers to lower their taxable income by the amount of interest paid on a mortgage, up to a limit of $1.1 million, used to (1) obtain or (2) improve a principal or secondary residence. According to the Tax Foundation, a think tank based in Washington, D.C., “The third most popular deduction is the interest paid deduction, the major component of which is the mortgage interest deduction. 34 million taxpayers claimed this deduction in 2013, most of whom were households with over $75,000 in income.”
The House version of the tax reform bill would cut the MID roughly in half, lowering the deductible amount of mortgage interest from $1.1 million to $500,000. Under the House plan, the deduction would also be limited to the homeowner’s principal residence only, while homeowners would be prohibited from deducting interest paid on home equity loans.
The Senate version of the bill makes less radical changes, reducing the deductible amount of mortgage interest by $100,000 from $1.1 million to $1 million. Like the House proposal, the Senate proposal would prevent homeowners from deducting interest paid on home equity loans, but unlike the House version, would not exclude secondary residences.
The tax reform proposals would also impact existing laws regulating property taxes. For example, the Senate bill has no itemized deduction for property taxes, while the House bill allows up to $10,000.
Some CPAs, including the experienced tax and accounting professionals here at the Tax Law Office of David W. Klasing, have concerns about the potential tax repercussions of some elements of these proposals. For example, one could argue that removing an itemized deduction for property taxes is unfair, as the deduction for property taxes and mortgage interest is part of most Americans’ decisions to buy, rather than rent, their primary residence. This also unfairly impacts those Americans that live in more expensive parts of the country, such as California. The income tax system should not penalize some Americans to the benefit of others and may very well violate the commerce and equal protection clauses of the US constitution as has so many other actions taken by the current administration. Tax law invariably effects the financial decisions of Americans, and sound financial decisions in the past should not lead to tax disadvantages in the future with poorly thought-out tax policy changes or punitive tax law changes aimed at California and New York which are both states that are pushing back hard on the current administration.
One might argue that the amount of mortgage interest that is deductible should not be cut for the same reasons: (1) taxpayers need predictability to make sound financial decisions, and Americans would not have purchased as expensive a home had they had any idea this would occur in the future, while further, (2) this change would disproportionately impact taxpayers living in expensive parts of the country, where residents typically make higher incomes in a different manner from those living in less expensive areas of the United States.
Similar arguments can be made against the limitation on State Taxes. Some are expecting a mass exodus from high-income tax states by those seeking a lower federal tax burden. Frankly, I am appalled as Tax Attorney and a CPA that this admiration could have the gall to call this a Tax Break where the most apparent effects of the proposed changes are to increase taxes on the middle class and pass of the savings to the rich. This is one Ex-Republican that will be voting a straight Democratic ticket in 2018 and sending a resounding “your fired” to our current administration.
The bottom line? Congress should not be unfairly “shuffling the deck” on God Fearing and Hard-Working Americans. The current tax changes are poorly thought out and poorly executed which should be no surprise based on the current administration’s track record. The two complained of provisions (mortgage interested and state tax deductions) would not withstand a well-financed constitutional challenge. Please give Mr. Erwin Chemerinsky a call to see if he’s interested… our nations most gifted constitutional scholar. Hopefully, sanity will return to the United States following the impending impeachment at best, lame duck at worst, administration following the 2018 elections. Mr. Trump – You’re Fired! Please save the American public the embarrassment of the impeachment proceedings and go ahead and quit first… Republican Congress – Your Fired come 2018! Paul Ryan sees the writing on the wall! Signed – one disappointed Ex-Republican! Now if the Democrats can just give us a decent candidate for President….
With Christmas 2017 just around the corner, legislators are scrambling to perfect a final tax bill for signature by President Trump. If the members of Congress can stay on schedule, a new bill, synthesized from the initial House and Senate proposals, might begin laying the foundations for major tax reform in a matter of weeks. This would have swift and substantial effects upon millions of taxpayers, including Americans who have recently bought, or are currently in the process of buying, a first or second home. Methodical, experience-driven, step-by-step financial guidance will be essential for taxpayers – particularly mortgagors – to ensure not only compliance, but also strategic utilization of deductions and credits.
At the Tax Law Office of David W. Klasing, our trusted team of California tax attorneys, CPAs, and EAs brings more than 20 years of tax and accounting experience to every financial matter we handle. Whether our Irvine tax lawyers are assisting first-time homeowners with tax preparation, are helping a worried client catch up on unfiled back taxes, are explaining California sales tax requirements to a small business owner concerned about a tax audit, or are aiding a taxpayer with a different process, we pride ourselves on providing zealous, aggressive, on-point guidance. Our goal is to help you minimize your tax liabilities and exposure to penalties, while simultaneously helping you make financial planning decisions that use the Tax Code wisely. To learn more about the tax planning services we offer for California residents, businesses, and out-of-state taxpayers, contact the Tax Law Office of David W. Klasing online, or call today at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
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