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Here’s How the House and Senate Tax Reform Plans Would Affect Homeowners

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House and Senate Republicans have rolled out separate versions of tax-reform plans, aiming to cut taxes for corporations and individuals. Although the two bills diverge in a number of ways and the fate of both remains in flux, one thing’s for certain: Homeowners would be affected under both plans.

In this article, we lay out the changes to housing-related provisions under both plans and explain what they would mean for existing homeowners and first-time homebuyers.

Where are we?

The House version of the tax bill passed by a 227-205 chamber vote ahead of Thanksgiving. The Senate Committee on Finance approved the Senate’s version of the Tax Cuts and Jobs Act late on Nov. 16 with a 14-12 vote along party lines.

The Senate’s bill is to go to the full Senate for a vote the week following the Thanksgiving holiday. President Trump has called on lawmakers to pass one cohesive bill by Christmas, and Republican legislators would like to see the reforms take effect in 2018.

What are the changes?

Here’s a quick overview of housing-related changes proposed in the bills:

  • Both bills nearly double the standard deduction, while eliminating personal exemptions.
  • The House and Senate both proposed changing residency requirements for capital gains home-sale exclusions by increasing the live-in time period to five out of the last eight years. Current law allows people to write off up to $250,000 — or $500,000 for couples filing jointly — from capital gains when selling a home, as long as they have lived in it for two out of the past five years.
  • Under the House plan, mortgage borrowers can deduct mortgage interest on loans up to $500,000, for debt incurred after Nov. 2, 2017. Currently, the tax deduction cap is $1 million. The deduction for state and local income taxes would be gone. But the state and local property tax deduction would remain but be capped at $10,000. (There is no cap, currently.)
  • The Senate bill would leave the mortgage interest deduction unchanged, but eliminate all state and local tax deductions (SALT), including deductions for property taxes.

Read more about the Senate and House bills here.

Fewer people will claim mortgage interest deductions

The National Association of Realtors (NAR), a vocal critic of the tax reform proposals, expressed through statements and press briefings that both plans would negatively affect homeownership. The association has called the tax reform legislation an “overall assault on housing.”

“Simply preserving the mortgage interest deduction in name only isn’t enough to protect homeownership,” NAR President Elizabeth Mendenhall said in a statement.

Nearly doubling the standard deductions and repealing some itemized deductions would likely mean that far fewer people would itemize when they file taxes. NAR officials worry that these moves will undercut the incentives to pursue homeownership.

The standard deduction is a fixed dollar amount, based on your filing status and age, by which the IRS lets you reduce your taxable income. The itemized deduction allows you to list your various deductions, including the mortgage interest deduction. You can claim one or the other — whichever lowers your taxable income more.

The standard deduction for a married couple filing jointly is $24,400 under the House plan and $24,000 under the Senate plan. Wolters Kluwer, a global information services company, suggested in an analysis that only those taxpayers who would deduct more taxes through itemizing than taking the bigger standard deduction — the top earners — would benefit from itemizing deductions like the one for mortgage interest.

Impact under House plan

Capping the mortgage interest deduction

The good news is that the majority of existing homeowners won’t be affected by the cap on the mortgage interest deduction, because only about 21 percent of American households take the deduction under the current law, according to the Tax Policy Center.

But about 18.5 percent of new homebuyers would get hit with a bigger tax bill on their housing-related tax liabilities, according to an analysis released by Trulia, an online real estate resource for homebuyers and renters.

Many economists say the mortgage interest deduction distorts the housing market by driving up home prices and soaking up much-needed supply, and that it doesn’t necessarily help increase homeownership rates.

“Because the mortgage interest deduction skews to upper-income families, it encourages people to buy bigger homes,” Nela Richardson, chief economist at Redfin, a Seattle-based real estate and technology company, told MagnifyMoney. “It also encourages builders to also build bigger homes, so it encourages sprawl.”

Less than 10 percent of the bottom 90 percent of the income distribution receive the tax subsidy on mortgages, the Tax Policy Center said.

Richardson added that this doesn’t mean the deduction should be completely eliminated. She said she thinks putting a cap on the deduction is only to make the math work for the corporate tax cut, though it is not structured in a way to help middle-class homeowners.

“People who have the means to buy those homes” with a mortgage of more than $500,000 “would continue to buy those homes,” Richardson said. “What we’d like to see is [changes] to help buyers who wouldn’t be able to afford a house unless they got some kind of tax credit. That would be a subsidy that was progressive instead of regressive.”

A silver lining to some: Middle-class homeowners might benefit from an income tax cut, which hopefully would help them purchase a house, experts say.

“The result of that is still a little fuzzy,” Richardson said. “It’s not clear that middle-class buyers in the long run would actually receive an income tax cut.”

What does it mean to first-time homebuyers in expensive cities?

The mortgage interest deduction provides little benefit to new home buyers because many new U.S. homeowners do not itemize or are in the 15 percent tax bracket or lower, William G. Gale, chairman of federal economic policy in the Economic Studies Program at the Brookings Institution, wrote in an analysis for the Tax Policy Center.

First-time buyers are generally looking for cheaper homes. Nationally, the median sales price for existing homes is $245,100, according to the Federal Reserve Bank of St. Louis, well under the $500,000 cap, so capping the mortgage interest deduction shouldn’t affect them too much.

But for buyers in high-cost markets, where demand is high and affordability is challenging, the cap will sting, Richardson said.

“You cannot find a $500,000 home in the Bay Area,” Richardson said. “Good luck with that.”

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In San Francisco, the median home sales price is around $1.2 million, according to Redfin and Trulia.

Home prices are expected to go up next year, as the Federal Reserve is expected to increase the short-term interest rate by year’s end, economists say.

“For the first-time buyer, you are dealing with this double whammy,” Richardson said. “If you add onto the fact that really expensive states’ first-time home buyers won’t be able to deduct all of the mortgage interest, then that is an additional expense. So it really is a challenging situation to put new buyers in.”

Trulia reported that across the 100 largest markets, more than half of homebuyers in coastal California, New York and Cambridge, Mass., would experience an increase in their home-related tax liabilities if they purchased a home under the House plan.

Impact on housing supply

Real estate experts expect less movement in the housing market since people who already own homes with big mortgages can continue to deduct the interest. This would make the housing supply crunch even worse in those expensive markets because people may choose to stay in the same house, knowing they couldn’t deduct the same amount of interest on their next big mortgage.

Factor in a longer live-in requirement for capital gains exclusions of homes sales, which economists believe will result in more homeowners waiting longer before moving to a different house to save on capital gains, and it would be even trickier for first-home buyers to bid for a desirable house in higher-end markets.

“It’s definitely not going to help alleviate price increases,” Cheryl Young, senior economist at Trulia, told MagnifyMoney. “But it will also contribute to competition.”

Trulia found that roughly 10 percent or more of existing homeowners in California and the Northeast would lose the incentive to sell their homes. Nationwide, the figure is 2.5 percent.

What does it mean for homeowners in high-tax states?

People living in high-tax states, such as New Jersey, New York and California, where homes are also costly, will see a rise in their property tax liability on taxes paid above the $10,000 property-deduction cap.

Trulia estimates that more than 20 percent of existing homeowners in New York and San Francisco would experience an increase in their property tax bills. Nationally, about 9.2 percent of existing homeowners will experience an increase in their property taxes.

Impact under Senate plan

Bigger property tax liability

Although the Senate plan is in some respects seen as more straightforward than the House bill, removing all SALT deductions would have a more expansive impact on homeowners across the country. That’s because they wouldn’t be able to deduct their property taxes anymore, Trulia’s chief economist, Ralph McLaughlin, explained in an analysis.

Existing homeowners in the Northeast and the Bay Area — New Jersey, New York, Connecticut and California — would be hit the hardest, according to McLaughlin.

A study commissioned by the National Association of Realtors and conducted by PricewaterhouseCoopers (PwC) found that, for many homeowners who currently benefit from the mortgage interest deduction, the elimination of other itemized deductions and personal exemptions would cause their taxes to rise, even if they elected to take the increased standard deduction.

The study found that homeowners with adjusted gross incomes between $50,000 and $200,000 would see their taxes rise by an average of $815.

Mortgage interest deduction would be worth less

Leonard Burman, a fellow at the Urban Institute and professor of public administration and international affairs at Syracuse University, wrote in an analysis that if homeowners cannot deduct state and local income, sales and property taxes, only the very wealthy and the very generous would benefit from itemizing. As a result, he estimated that only 4.5 percent of households would itemize under the plan, compared with the current 26.6 percent.

“Even for those who continue to itemize, the mortgage interest deduction may be worth much less than many homeowners believe,” Burman wrote. “This is because net tax savings depend not only on whether mortgage interest plus other deductions exceed the standard deduction, but by how much.”

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen at shenlu@magnifymoney.com

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House Passes Tax Reform Bill: What It Means for You

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Update: House Republicans have passed a sweeping tax bill that would cut both corporate and income taxes by $1.5 trillion, bringing the country one step closer to the biggest taxation overhaul in decades.

The House passed the Tax Cuts and Jobs Act in a 227-205 vote, bringing President Trump nearer to his first major legislative accomplishment since he took office in January.

“Today’s vote brings America one step closer to historic tax cuts that will allow Americans to keep more of their hard-earned money,” Ronna McDaniel, chairwoman of the Republican National Committee, said in a statement shortly after the vote. “President Trump and Republicans in Congress are keeping their promise to give workers a raise, support American businesses and grow our economy.”

Some experts say the whopping $1.5 trillion tax cut will benefit many taxpayers. But will some lose out? And what does it all mean for you?

As expected, in order to pay for the tax cuts, lawmakers chose to get rid of or limit many key tax breaks. Some of the items on the chopping block under the Republicans’ plan, which include personal exemptions, deductions for medical expenses, paid student loan interest and paid mortgage interest, could impact millions of Americans.

“It really depends on the individual situation whether they’ll be more helped or hurt,” Mark Luscombe, principal federal tax analyst at Wolters Kluwer, told MagnifyMoney. You can read the entire bill here.

What happens next?

The bill will move for a vote in the Senate, which hasn’t yet voted on its own version of a tax cut plan. Trump has called for lawmakers to pass one cohesive bill by Christmas. Republican lawmakers would like to see the reforms take effect in 2018.

But the tax overhaul has a long way to go. The House and Senate proposals differ on a number of major provisions, which will make it tough for the two bills to be reconciled and spur clashes over tax policy. To see what the Senate has in store, check out this post.

Keep reading for a summary of the tax changes to come and how they might affect your bottom line:

How individual tax brackets will change

The bill compressed the current seven-tier tax system into four tax brackets: 12 , 25, 35 and 39.6 percent. The top individual tax rate remains unchanged at 39.6 percent.

The new bottom bracket of 12 percent is higher than the current bottom bracket of 10 percent but replaces the 15 percent bracket as well. The proposal will also push some in the current 33 percent bracket into the 35 percent. So there will be some shuffling, and its impact on you depends on your earnings picture.

Here’s the breakdown of brackets for married filers:

The income threshold for the 25 percent bracket moves to $90,000, up from $75,900 for married couples. The 35 percent bracket starts at $260,000, and the top tax rate starts at $1 million.

Next, let’s look at tax deductions. Under the plan, some would increase.

Deductions that would be increased

Standard deduction

Under the House plan, the standard deduction would be almost doubled. The standard deduction is a dollar amount that reduces the amount of income on which you are taxed.

For individuals, the standard deduction would rise from $6,350 to $12,000. For married couples, it would go up from $12,700 to $24,000.

But personal exemptions, currently $4,050 per person, would now be included in the standard deduction, so the actual increase isn’t as big as it seems at first blush. Under the current tax code, taxpayers could claim one personal exemption for themselves and one for a spouse.

The change in personal exemption will likely offset the benefits from the standard deduction for many to some extent. “If they are doubling the standard deduction but eliminating the personal exemption, a single parent with a number of kids could actually be hurt by that on a net basis,” Luscombe said.

Child tax credit

The House bill also proposes to expand the child tax credit, which allows parents to offset expenses of raising children, from $1,000 to $1,600.

The bill also will provide a credit of $300 for each parent with a dependent who is not a child, such as a grandfather or a college student. Those $300 credits expire in five years.

Those credits are seen by advocates as helping some families make up for the loss of personal exemptions.

401(k) contribution limits

Unlike what was suggested in an earlier round of rumors, the Republicans did not call for reducing the contribution limits for 401(k) accounts. Phew.

For 2018, workers under age 59.5 can contribute $18,500 to a 401(k) on a pre-tax basis.

But still, more changes are proposed, with some deductions changed or ended under the proposal.

Deductions that will be eliminated or altered

Mortgage-interest deduction

The House bill keeps the home mortgage interest deduction for existing mortgages. But for newly purchased homes, the home mortgage interest deduction is lowered to $500,000 from the current $1 million debt limit.

It could well put a damper on higher-end home purchases, where half of a $1 million mortgage is not eligible for interest deduction, Luscombe said.

Medical expenses

Medical-expense deductions are going away. Right now, individuals can deduct qualified medical expenses that exceed 10% or 7.5% of their adjusted gross income (depending on age). Households with outstanding medical costs and are eligible for the deductions will feel significant effects from the repeal. The provision could have big implications for families with high medical costs during the year.

Student loan interest

The deduction for student loan interest could also be eliminated under the Republican tax reform.

Under current rules, borrowers may deduct up to $2,500 in interest payments on student loans on their federal income tax returns. The loss of the deduction would put a heavier financial burden on hundreds of thousands of college graduates grappling with significant education debt.

The state and local income tax deduction

The Republicans are further calling for an end to the deduction for state and local income/sales taxes.

The IRS allows those who make payments for state and local income taxes to deduct them on their federal tax return. The loss of the deduction is seen by some critics as hurting people in high-income tax rate states, such as New York and California.

But the proposal would keep in place the state and local property tax deduction, although capping it at $10,000.

The estate tax

Republican lawmakers proposed to double the estate tax exemption from $5.49 million to nearly $11 million and eventually do away with it. The estate tax is the tax you pay to inherit property or money from a deceased person.

This means families don’t have to pay taxes on any inheritance under $11 million. The bill calls for repealing the estate tax after six years.

In addition to reducing or eliminating several tax breaks, Republicans hope that the tax cuts will boost the economy, foster business growth, make the U.S. business environment more competitive with other countries’ in terms of tax rates, and even spur wage growth. This, in, turn, would bolster tax revenue, supporters say. But critics fear a surge in the budget deficit, with implications for future generations.

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen at shenlu@magnifymoney.com

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What Happens if Republicans Repeal the Obamacare Individual Mandate?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Senate Republicans on Tuesday proposed to repeal the individual mandate under the Affordable Care Act by 2019 as a part of their tax reform plan.

With open enrollment for 2018 Obamacare coverage well underway, and after two failed attempts earlier this year to repeal the ACA, the Senate’s proposal has reignited feelings of uncertainty over the health care law’s future.

The Senate’s proposal also came a couple of days before House Republicans’ planned Thursday vote on their own tax reform bill. (The House’s version does not propose to touch the insurance coverage requirement.)

Part of the reason behind the Senate’s proposal to cut the individual mandate is to help free up federal dollars and partially offset a sweeping $1.5 trillion tax cut proposal. Without the mandate, fewer people would likely sign up for coverage and that would mean less money the government would need to spend on the tax subsidies it offers to balance out the cost of premiums for millions of Obamacare enrollees.

The Congressional Budget Office estimates that if the individual mandate is eliminated, it will save the federal government $338 billion, and 13 million more people — mostly the young and healthy — will be uninsured by 2027.

Here is what you need to know about the individual mandate and what it means if it goes away:

What is the individual mandate?

The individual mandate is a provision under the ACA that requires most U.S. citizens and noncitizens who lawfully reside in the country to have health insurance. It was signed into law in 2010. Consumers who can afford health insurance but choose not to buy it have to pay tax penalties unless they are otherwise insured or meet certain exemptions.

The purpose of the mandate was partially to ensure that even healthy and young Americans would sign up for health coverage, balancing the so-called insurance risk pool and helping to keep premiums affordable.

Why is the mandate unpopular?

The provision has been widely unpopular since its introduction. The Kaiser Family Foundation’s latest poll suggests that 55 percent of Americans supported the idea of removing the individual mandate as part of the Republican tax plan.

More than 27 million people in the United States remained uninsured in 2016, the foundation reported, down from 47 million prior to the implementation of the ACA.

How does the individual mandate work?

The tax penalty for nonexempt individuals who do not sign up for health coverage is calculated as a percentage of household income or as a fixed amount per person. You’ll pay whichever is higher.

For 2017 the penalty was either:

  • $695 per adult and $347.50 per child, up to $2,085 per family, or
  • 2.5 percent of household income

The maximum penalty can be no more than the national average price of the yearly premium for a Bronze plan (the minimum coverage available in the individual insurance market) sold through the insurance marketplace.

HealthCare.gov hasn’t yet published the 2018 guidance, but Kaiser has launched a calculator using 2018 projections from Bloomberg BNA. For 2018, the calculator estimates the amount of penalty is $3,816 for a single person and $19,080 for a family of five or more, according to the foundation.

2018 Individual Mandate Penalty Calculator

Some people are exempt from the penalty

You meet exemptions if coverage is considered unaffordable based on your income — under the ACA, “unaffordable”’ is if you would have had to pay more than 8.05 percent of your household income for the annual premium amount for health coverage in 2015 or 8.13 percent last year.

If you have experienced economic hardships or difficult domestic situations, such as homelessness, the death of a family member, bankruptcy, substantial medical debt or the toll of a disaster that damaged your property badly, you may apply for a hardship exemption.

People who are ineligible for Medicaid because their state hasn’t expanded that program also qualify for a hardship exemption. Those whose incomes are at or below 138 percent of the federal poverty level are eligible for Medicaid. That 138 percent means a little over $16,600 every year for a single person and nearly $34,000 for a family of four.

See more examples of people who qualify for penalty exemptions at IRS.gov.

You can find out if you are exempt from health care coverage using this tool:

What does it mean if the individual mandate is lost?

The immediate concern is that without fear of a tax penalty, not enough young, healthy people would get covered. When these low-risk people drop out of the market, coverage is skewed toward older, sick people who really need coverage. And that can lead to rapid increases in premium costs and even induce some insurers to drop out of the market.

Larry Levitt, senior vice president for special initiatives at the Kaiser Family Foundation and senior adviser to the foundation president, summarized his thoughts on the loss of the mandate in a series of tweets Wednesday, saying he’s “doubtful” insurers would remain in the marketplace if the mandate were removed:

Senate Majority Leader Mitch McConnell, R-Ky., defended the proposed repeal in a statement on Wednesday.

“We can deliver even more relief to the middle class by repealing an unpopular tax from an unworkable law,” he wrote. “It just makes sense.”

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen at shenlu@magnifymoney.com

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