The Republican Tax Bill: A Rude Gesture Aimed at the Urban Affluent Class

Think of this bill as a game of Find the Pea under the Shell: will you pay more, will you pay less, will you owe neither more nor less?  Keep your eyes on the pea, watch it, watch it, as the barker changes rates, removes deductions, limits deductions, adds to credits, takes away credits, and tinkers with income thresholds.

You don’t have a prayer of winning this shell game unless you know your way around a spreadsheet and are in the habit of simulating in Turbo Tax how much tax you owe under different income scenarios.  Not many people have that habit; but I’m here to help.

As an aside, might the Republican bill be explicitly designed to obfuscate its effects on individuals?  I can’t say; but that would be a clever stratagem, wouldn’t it? How can you muster opposition to a bill when few voters can estimate its personal impact?

Here goes.

The Urban Affluent Class

You, and maybe your spouse, have a graduate degree: MBA, JD, MD, Ph.D, M. Engineering, etc.  If not, you and your spouse are probably an executive, manager, or professional. Family income is $200,000, or $400,000, or even somewhat more, depending on geographical location. How did you arrive at this fine income? Good education, good job, decades of striving.

Many of the urban affluent live in Democratic states on either coast; but plenty are found in red states, as long as that state has a large urban area: so Texas yes, Wyoming no.  And that may be the Achilles heel of the current bill: even in blue states, the urban affluent often vote Republican; the more so in red states.  When they discover they personally not only didn’t get a tax cut, but now owe even more tax, there’ll be hell to pay.

After all, what campaign ad, when directed against a Republican representative, could be more devastating: “He raised your taxes.”

The Shell Game

1. The standard deduction doubles
2. Personal exemptions go away; these may (or may not) be replaced by a personal credit of $300 per dependent, which in any case, expires after a few years
3. State and local income taxes can’t be deducted anymore
4. Property taxes can now only be deducted up to $10,000 / year
5. Rate brackets are collapsed, some rates change, and the income thresholds are changed; if your current bracket merges with the one below, your rate goes down; if collapsed with the one above, your rate may go up, depending on where you were within the old brackets.
6. The Alternative Minimum Tax goes away (and since few understand it today, fewer still will understand whether they might benefit from its removal)

There are many other changes, of course, including an increase to the child tax credit.  To keep things simple, throughout I’ll assume a family of four, with the children over 17 and no longer eligible for the child tax credit (perhaps to be revisited in a future blog post).  So, one child is 18 and at the local community college, one child is 19 or 20 and away at college. Nobody in my examples benefits from any of the college credits or deductions, so we can also ignore any changes to those.

Four examples

I’ll take a family earning $200,000 and one earning $400,000, and place them in greater Los Angeles (state income tax bracket about 10% at these levels), or Dallas (no state income tax). Current mortgage equals 2X income in Dallas, 2.5X income in Los Angeles, with interest paid at 4.5%.  Property tax is 1% of property value in Los Angeles, on property worth 33% more than the mortgage; but 2% in Texas (where property tax runs high).

[You see how quickly it grows complicated to estimate the impact of this tax bill across myriad individual family circumstances].

All examples use the 2018 IRS rates; details of the new tax are from the November 5th JCT.gov explanation, 50-17

 

Prosperous at $200K: Dallas, Texas

	Today (2018 rates)	New Republican plan
Adjusted Gross Income* (Bottom of the front page of your 1040)	$200,000	$200,000
Four personal exemptions	(16,600)	—
Mortgage interest	(18,000)	(18,000)
Property tax	(10,650)	(10,000)
Taxable income	$154,750	$172,000
Total tax, Now:10%/15%/25% brackets New: 12% on $90,000 25% on excess up to $260,000	$30,000	$31,300
New personal credits (which expire)		(1200)
Result:		~wash

 

For our prosperous Dallas family, the new tax plan is about a wash—if the personal credit stays, and before it expires. Else, it’s a tax hike of over $1000.

Huh—no tax cut for these rock-ribbed Texas Republicans?  How’d that happen?

Ah, if their two kids were 17 or under, then there would be a tax cut, via the new child tax credit of $1600 x 2, or $3200.  (In earlier years, when these Texans’ kids were younger, their income was too high for the Bush child tax credit, which they did not get to enjoy.) The new child tax credit, available through their income level, is a significant cut.  Too bad their kids grew up!

 

Doing alright at $200,000: Los Angeles, California

	Today (2018 rates)	New Republican plan
Adjusted Gross Income* (Bottom of the front page of your 1040)	$200,000	$200,000
Four personal exemptions	(16,600)	—
Mortgage interest	(22,500)	(22,500)
Property tax	(  5,000)	(  5,000)
State income tax	(10,000)	—
Taxable income	$145,900	$172,500
Total tax, Now:10%/15%/25% brackets New: 12% on $90,000 25% on excess up to $260,000	$27,782	$31,425
New personal credits (which expire)		(1200)
Result:		Tax hike!

 

Whoa!  This family, barely comfortable in LA, takes it on the chin: a $3000+ tax hike before the credits–ouch! Okay, at least this Republican bill is ideologically consistent in treating Californians worse than Texans.

Well, serves those blue state denizens right for voting 2 to 1 against Donald Trump, and sending so few Republicans to Congress.  Sock it to them!

Oh—how many Republican representatives are from California? Well that’s some consolation: imagine how many fewer might there be, after this tax hike passes. Heh heh heh.

 

Doing well at $400K: Dallas, Texas

	Today (2018 rates)	New Republican plan
Adjusted Gross Income* (Bottom of the front page of your 1040)	$400,000	$400,000
Four personal exemptions (after phaseout)	(10,200)	—
Mortgage interest	(36,000)	(36,000)
Property tax	(21,600)	(10,000)
Deductions lost to phaseout	+2,400	—
Taxable income	$334,600	$354,000
Total tax, Now:10%/15%/25%/33% brackets New: 12% on $90,000 25% on excess up to $260,000 35% above $260,000	$85,143	$86,200
New personal credits (which expire)		(1200)
Result:		~wash

 

Once again, the Texan family is left empty-handed, but doesn’t suffer much of a hike, if the personal credit stays. Is that what these Republican voters expected? Where’d my tax cut go?

 

	Today (2018 rates)	New Republican plan
Adjusted Gross Income* (Bottom of the front page of your 1040)	$400,000	$400,000
Four personal exemptions (after phaseout)	(16,600 (AMT)	—
Mortgage interest	(45,000)	(45,000)
Property tax	(10,000) (AMT)	(10,000)
Deductions lost to phaseout	(  2,400) (AMT)	—
State income tax	(30,000) (AMT)
AMT exemption remaining	(39,075)
Taxable income (AMTI)	$313,525	$345,000
Total tax, Now: Alternative Minimum Tax New: 12% on $90,000 25% on excess up to $260,000 35% above $260,000	$83,957	$83,050
New personal credits (which expire)		(1200)
Result:		Tax cut!

 

Well whaddaya know: at this income level, the Californian family does better than the Texan family, saving over $2000 per year.  But that’s only because the convoluted AMT system is abolished. (You’ll have to take my word that I figured their AMT correctly; too complex to explain here.)

Tax cuts for affluent Californians–how’d that happen?

But wait—what is the meaning of this text, from page 107 of  the JCT-50 explanation from November 5^th:
“The proposal allows the AMT credit to offset the taxpayer’s regular tax liability for any taxable year. In addition, the AMT credit is refundable for any taxable year beginning after 2018 and before 2023 in an amount equal to 50 percent (100 percent in the case of taxable years beginning in 2022) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Thus, the full amount of the minimum tax credit will be allowed in taxable years beginning before 2023.”

 

On its face, if you happen to have an AMT credit from prior years, then you can now deduct all of your accumulated credit against your regular tax; and if your credit exceeds your regular tax liability in, say, 2018, you can also get a refund of 50% of the unused credit—the government will cut you a check.

If I’m correct, and this Californian couple has been paying AMT for years, then they may owe zero taxes next year.  Take that, red state Republican voters! (Most ordinary people who regularly pay AMT of a few thousands per year live in blue states.)

Of course, the California bonus, as this might be called, is unintentional—the provision is presumably aimed at one Donald Trump, who, if his 2005 tax return is any indication, stands to get tens of millions of dollars in tax-free cash out of this AMT credit refunding provision.

PS: to see what your own AMT tax credit may be (it could be hundreds of thousands of dollars, assuming you’ve paid AMT for a decade or more), simply open last year’s return in Turbo Tax, and give yourself enough 1099-R income to take your AGI to $700,000 or so.  Then look for Form 8801 in the forms list.