Tax-Reform and the Housing Market.

[Gone4Good]

Small side point: The mortgage interest deduction does not make housing more affordable. People buy as much house as they can afford based on the monthly payment. If you subsidize the monthly payment, people demand more house, which pushes up housing prices - keeping affordability constant, more or less. The beneficiaries of the home mortgage deduction are lending institutions that collect more interest on the larger loan balances.

Another perverse impact of the home mortgage deduction is that it may actually make real estate less affordable for first-time buyers who need to come up with larger initial downpayments on the inflated housing price.

Just one more example of the unintended consequences that develop whenever government tries to "help you."

 

[Danny]

WASHINGTON, Oct. 18 - President Bush's tax advisory commission agreed today to recommend two alternative tax plans, both of which would limit or eliminate almost all tax deductions, including the ones for state and local income and property taxes.

President Bush is not committed to adopting the commission's recommendations, and many of the proposals are sure to be unpopular in Congress.

One of the most important elements of the plans is that they would replace almost all deductions with tax credits. This would mean that an expense, like the interest payments on a modest-sized mortgage, would be worth the same to each taxpayer regardless of income. Deductions are worth more to taxpayers in high brackets than they are to those in lower brackets.

For individuals, the two plans are almost identical. These are some of the main elements:

The alternative minimum tax, a steep levy faced by an increasing number of middle-income taxpayers, would be abolished.

The tax break on home mortgages would be sharply limited, especially for expensive houses.

No deduction would be allowed for state and local income and property taxes.

Employer-paid health insurance premiums above $5,000 a year for an individual and $11,500 for a family policy would be treated as income to workers and taxed accordingly.

All taxpayers could deduct charitable donations, but only to the extent they exceeded 1 percent of a taxpayer's income.

Personal exemptions and deductions and credits for children would be eliminated and replaced by a credit of $1,600 for a single person, $3,200 for a couple, $1,500 for each child and $500 for each other dependent.

The myriad savings vehicles available now like individual retirement accounts and 401(k) plans would be replaced by three streamlined savings plans and a refundable savings credit for low-income workers.

The six tax brackets in the existing law would be replaced by four, with a low bracket of 15 percent and a top rate of 33 percent. The top rate now is 35 percent.

The two plans differ on the way they would treat investment income. One would eliminate taxes on dividends entirely, lower the top capital gains rate to 8.25 percent on the sale of stock in American corporations and tax interest income at the same rate as wages and salaries.

The other plan would have a 15 percent rate on dividends, interest and capital gains. The rate now is 15 percent on dividends and capital gains, and interest payments are taxed like earned income.

The commission would raise to $600,000 from $500,000 the amount of profits from home sales that would be excluded from capital gains taxes.
http://tinyurl.com/atvo3

 

[retire@40]

One of the most important elements of the plans is that they would replace almost all deductions with tax credits. This would mean that an expense, like the interest payments on a modest-sized mortgage, would be worth the same to each taxpayer regardless of income. Deductions are worth more to taxpayers in high brackets than they are to those in lower brackets.

It depends on the amount of the credit, but this may be a good idea.

The alternative minimum tax, a steep levy faced by an increasing number of middle-income taxpayers, would be abolished.   

Good idea.  The alt-min tax is a disaster, mostly because they never made adjustments to keep it out of the middle class.  It hurt a lot of people with stock options, especially when there were large swings in stock values.  At the very least, it should be abolished for the middle class.  Maybe keep it for the super rich.

The tax break on home mortgages would be sharply limited, especially for expensive houses.

I'd need to see the final details on this, but this could be a major problem.  The $1mil rule seems to be working well.  The tax break should be an incentive for poor and middle-class people to buy their first home, not for the super rich to buy mansions.  If anything, I would limit the mortgage interest and real estate tax deduction for rental property.

No deduction would be allowed for state and local income and property taxes.  

Bad idea.  In fact, a credit should be given instead of a deduction.  There is too much double taxation as it is.

Employer-paid health insurance premiums above $5,000 a year for an individual and $11,500 for a family policy would be treated as income to workers and taxed accordingly.

I'll go with this if they also agree to put a cap on insurance premiums.  If premiums are above these amounts, the insured is already getting screwed by the high rates.  Now we are going to screw them even more by taxing the poor bastards?  I don't see the purpose of taxing extremely high insurance premiums.  If anything, they should tax the insurance companies for being so inefficient that they have to raise premiums higher than inflation.

All taxpayers could deduct charitable donations, but only to the extent they exceeded 1 percent of a taxpayer's income. 

Good idea.  There's too much abuse in the charitable donation deduction as it is now.

Personal exemptions and deductions and credits for children would be eliminated and replaced by a credit of $1,600 for a single person, $3,200 for a couple, $1,500 for each child and $500 for each other dependent. 

This is like six of one, half-dozen of the other.

The myriad savings vehicles available now like individual retirement accounts and 401(k) plans would be replaced by three streamlined savings plans and a refundable savings credit for low-income workers.  

Finally!!!  There are too many different plans out there that do the same thing.  There should only be 2 types of accounts; deductible and tax-free, much like the traditonal and Roth IRAs.  It would also help if they removed all the income and contribution limits.

The six tax brackets in the existing law would be replaced by four, with a low bracket of 15 percent and a top rate of 33 percent. The top rate now is 35 percent.

This is almost a non-issue, but I would tend to leave the brackets as they are from a 10% low to a 35% high.  The current spread looks OK.  No need to tax the poor 5% more and the rich 2% less.  I know the rich also pay an extra 5% on the low end, but the poor don't get a 2% break on the high end.

The two plans differ on the way they would treat investment income. One would eliminate taxes on dividends entirely, lower the top capital gains rate to 8.25 percent on the sale of stock in American corporations and tax interest income at the same rate as wages and salaries. 

Personally, I would LOVE this.  But, I don't think it's fair to the rest of the population.  So it's a good idea for me, but a bad idea for the saps with no investments.

The other plan would have a 15 percent rate on dividends, interest and capital gains. The rate now is 15 percent on dividends and capital gains, and interest payments are taxed like earned income.

Again, good for me.  Bad for the people living paycheck by paycheck.

One of the biggest changes would be the limits on tax breaks for homeowners. Now, all interest payments on mortgage loans smaller than $1 million are deductible.

Leave it as is.

The commission would raise to $600,000 from $500,000 the amount of profits from home sales that would be excluded from capital gains taxes.

Most people don't even get close to the $500K anyway.  If anything, this a another break for the mansion-type people who don't need a break.  A better idea would be to keep the exclusion as is but prorate it based on the number of days lived in the home.

 

[Gone4Good]

The non-deductibility of state income taxes is huge and it is probably a non-starter. My guess is that this is where the tax committee found most of the money for all of the other goodies in the proposal (and is also a rationale for lowering the 35% bracket to 33%). You could almost see Chuck Schumer (Senator of New York) pop an aneurysm when he read this one.

Although I agree with retire@40's comment about double taxation, but some good could come of this if high tax states like NY & NJ (i.e. "blue" states) stop getting what is essentially a federal subsidy. If this were to go through you may very well see people try to flee these high tax holes, which would put some pressure on state governments to lower taxes - one can hope.

 

[Eagle43]

Yep, imagine that poor Mississippi helps pay for the high-dollar tax states such as NY and Massachussetts. Don't seem right to me. Of course I can hear y'all. Raise taxes in Mississippi, don't lower them in NY and Mass. Well, I say, let NY and Mass have all the taxes they want; just don't ask anybody else to pay for them, especially us in Texas.

 

[laurence]

Um, coming in late on this, but states like CA and NY actually subsidize states like Mississippi through Federal taxes. For every dollar sent to the feds, CA sees something like 60 cents in benefits, while states like Mississippi see something like $120. I can track down a link on this if you like.

 

[wabmester]

The two plans differ on the way they would treat investment income. One would eliminate taxes on dividends entirely, lower the top capital gains rate to 8.25 percent on the sale of stock in American corporations and tax interest income at the same rate as wages and salaries. 

This would be great as long as the overall plan is revenue-neutral (it actually looks like a stealth tax raise to me). I would increase my stock allocation quite a bit if this part of the plan looked likely to pass.

 

[maddythebeagle]

One would eliminate taxes on dividends entirely

The Norwegian Widow is somewhere dancing...

 

[Michael]

http://www.house.gov/paul/tst/tst2005/tst101705.htm

 

[HFWR]

Here, here!!

 

[brewer12345]

Don't get in too much of a tizzy over this stuff, guys.  The chances of any of this passing is non-zero, but probably about as close as theoretically possible (I can imagine a situation ivolving space aliens, but that's about it).

 

[retire@40]

Don't get in too much of a tizzy over this stuff, guys.  The chances of any of this passing is non-zero, but probably about as close as theoretically possible (I can imagine a situation ivolving space aliens, but that's about it).

I think you're right.  Last night I happened to catch a portion of this tax panel discussion on C-SPAN.  What a joke!  Not even the panel members in charge of creating and recommending these changes knew what they were talking about, nor could they agree on exactly what changes to make. 

They couldn't even figure out what to call their new tax scheme plan, so they ended up calling it plan A and plan B.  Even one of the political guys on the panel admitted it would be a hard sell.

 

[Gone4Good]

Don't get in too much of a tizzy over this stuff, guys.  The chances of any of this passing is non-zero, but probably about as close as theoretically possible (I can imagine a situation ivolving space aliens, but that's about it).

DOA IMHO!  Which is a shame.  The tax code is the most frustrating bunch of nonsense ever conceived.  Just thinking about how much work I have to do every year for the privilege of writing someone else a giant check makes me furious.            .  .  . 


My forms from last year's taxes:
Federal Form 1040
Schedule A - Itemized Deductions
Schedule B - Interest and Ordinary Dividends
Schedule C - Profit or Loss from Business
Schedule D - Capital gains & Losses
Schedule SE - Self Employment Tax
Form 1116 - Foreign Tax Credit
Form 6251 - Alternative Minimum Tax - Individuals
Form 1116 - Foreign Tax Credit (Alternative Minimum Tax)
Form 4562 - Depreciation and Amortization
Federal Estimated Tax Worksheet

New York Form IT - 203
New Jersey Form 1040
NJ Schedule A - Credit for income or wage taxes paid to other jurisdiction
NJ - 2210 Underpayment of estimated tax by individuals
NJ 1040-ES Estimated tax worksheet



I think I would be willing to pay even more in taxes if they would just make it a tad easier to comply with the f-ing law. 

 

[Nords]

I think I would be willing to pay even more in taxes if they would just make it a tad easier to comply with the f-ing law. 

Bite your tongue! The IRS might be reading this board too!!

 

[Mr._johngalt]

DOA IMHO!  Which is a shame.  The tax code is the most frustrating bunch of nonsense ever conceived.  Just thinking about how much work I have to do every year for the privilege of writing someone else a giant check makes me furious.            .  .  . 


My forms from last year's taxes:
Federal Form 1040
Schedule A - Itemized Deductions
Schedule B - Interest and Ordinary Dividends
Schedule C - Profit or Loss from Business
Schedule D - Capital gains & Losses
Schedule SE - Self Employment Tax
Form 1116 - Foreign Tax Credit
Form 6251 - Alternative Minimum Tax - Individuals
Form 1116 - Foreign Tax Credit (Alternative Minimum Tax)
Form 4562 - Depreciation and Amortization
Federal Estimated Tax Worksheet

New York Form IT - 203
New Jersey Form 1040
NJ Schedule A - Credit for income or wage taxes paid to other jurisdiction
NJ - 2210 Underpayment of estimated tax by individuals
NJ 1040-ES Estimated tax worksheet



I think I would be willing to pay even more in taxes if they would just make it a tad easier to comply with the f-ing law. 

Me?   1040A (3 pages) and IL1040 (2 pages).  Very quick and easy.
There was a time though when I had papers spread all over the house for about a month while I tried to assemble and plan my returns.  Don't miss
that much.  

JG

 

[maddythebeagle]

Don't get in too much of a tizzy over this stuff, guys.  The chances of any of this passing is non-zero, but probably about as close as theoretically possible (I can imagine a situation ivolving space aliens, but that's about it).

I do think there is enough steam to do something esp. about the AMT, but it sounds like something else will be taken off the table. I like my state tax deduction when I itemize, though. I think estate taxes are the way to go since when I am dead, I dont really care to much

 

[Gone4Good]

I think estate taxes are the way to go since when I am dead, I dont really care to much

This is a great idea. I will gladly swap a 0% rate while I'm alive for a 100% "death" tax!

(That the paperwork is someone else’s problem is just icing on the cake)

 

[Mr._johngalt]

This is a great idea.  I will gladly swap a 0% rate while I'm alive for a 100% "death" tax! 

(That the paperwork is someone else’s problem is just icing on the cake)

I'm kind of leaning that way myself, even though I currently pay no income
taxes. I have struggled with the issues which will linger after I am gone.
It's awfully tempting to leave the mess for others to sort out.

JG

 

[wabmester]

This is a great idea.  I will gladly swap a 0% rate while I'm alive for a 100% "death" tax! 

I'd be for an estate tax if there weren't so many loopholes in it. Rich people don't pay estate taxes, they just shelter their assets in a trust. So, the only thing elimination of the estate tax does is to save you a couple grand on legal fees. Works for me.

 

[Martha]

I'd be for an estate tax if there weren't so many loopholes in it. Rich people don't pay estate taxes, they just shelter their assets in a trust. So, the only thing elimination of the estate tax does is to save you a couple grand on legal fees. Works for me.

Most trusts are subject to estate tax. Have to do something like a charitable remainder trust where all the money goes to charity when you die.

 

[wabmester]

Most trusts are subject to estate tax.  Have to do something like a charitable remainder trust where all the money goes to charity when you die. 

Wow, I'm out of date. They closed the loopholes in 1986. So is the CRT income beneficiary taxed any differently than they would be if I were alive?

And who would possibly lobby against an estate tax? Kids? It seems like lawyers and insurance companies would be all over this. Even a lot of rich people think an estate tax makes sense.

 

[sgeeeee]

. . .And who would possibly lobby against an estate tax?   Kids?   It seems like lawyers and insurance companies would be all over this.   Even a lot of rich people think an estate tax makes sense.

I've always wondered about this. How did this become such a knee-jerk political issue? I know a number of people who don't even have enough net worth to be affected by the inheritance tax debate, but they get positively passionate about how it should be eliminated.

 

[retire@40]

Even a lot of rich people think an estate tax makes sense.

It does make sense because it helps spread money around the country. This government does not want money to get more and more concentrated in the hands of a few to create super dynasties. The lifeline of this country comes mainly from the middle class. The estate tax helps maintain that middle class. It's actually more of a penalty than a tax. A penalty for making TOO much money.

In this country, the more you make, the more you will get hit on the head by the government. This government not only feeds off of taxes, but also gets large cash infusions from levies, fines, and penalties. This is true for corporations as well as for individuals. It's a "Robin Hood" mentality.

 

[Michael]

How did this become such a knee-jerk political issue?

Crowd psychology. The mob just follows along, without regard to what is being stated.

 

[SteveR]

It does make sense because it helps spread money around the country.  This government does not want money to get more and more concentrated in the hands of a few to create super dynasties.  The lifeline of this country comes mainly from the middle class.  The estate tax helps maintain that middle class.  It's actually more of a penalty than a tax.  A penalty for making TOO much money.

In this country, the more you make, the more you will get hit on the head by the government.  This government not only feeds off of taxes, but also gets large cash infusions from levies, fines, and penalties.  This is true for corporations as well as for individuals.  It's a "Robin Hood" mentality.

Taxation has always been a Robin Hood mentality in this country. The very people that create jobs and keep the economy going are the ones that are penalized for being successful at it. Most people are willing to pay a fair tax but when it becomes conficatory, then it is no longer fair. The estate tax is no different. I have friends that had to sell the family farm (4 generations or more) because they could not pay the estate tax on it. Small family businesses fall under the same rules as megawealth tycoons.

Trusts are taxed but sheltered (generation skipping) so the surviving spouse can use the money without paying taxes on her husband's estate. Once she dies, the tax laws get real complicated real quick and the next generation may or may not have to pay estate taxes. There are limits on the amount you can shelter so if you plan on leaving some of your vast wealth to your kids or grandkids, then make sure you spend down your estate enough before you die to keep them from having to give most of it (60%+) to Fed. and state gov.

I hate the whole concept of Robin Hood taxation. Make it balanced and make it fair for all taxpayers.