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Mortgage interest Deduction limit... Toomey's Tombstone plan?


By LAO   Follow   Fri, 18 Nov 2011, 7:10am PST   2,648 views   17 comments
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Anyone know the details of Toomey's proposed MID cuts?

Top income tax bracket will drop from 35% to 28%... (HUGE HUGE tax cut for the rich). And tiny tax break for the poor.. lowest bracket will drop to 8% from 10%. (Savings of whopping $170 for the poor)

****Under their plan, the tax benefits from itemizing deductions and excluding employer-provided health insurance from taxable income would be limited to 2 percent of taxpayer's adjusted gross income.*****

So let's say a dual income LA family makes $110K a year.. They have a $340K mortgage.. high, but reasonable 3x income. They are probably seeing about $4K-5K in mortgage interest deduction a year currently... if you included $14K in interest payments at 4%... $5K in property taxes...

So that's $19K.. (well above standard deduction)... $19K x 25% = $4750 tax refund.

With this plan they will get SCREWED. While they'll see a measly $340 in savings in the lower bottom tax brackets... They're top bracket of 25% will remain unchanged. They're health benefits payed by their employer will now treated as taxable income. And the mortgage interest deduction cap of 2% gross income means they'll only see $2200 in savings max when itemizing.... Literally more than 50% less of a refund when itemizing their mortgage interest /property taxes alone!

Look out below.. If they want to instantly put every CA buyer who bought in the last 3-4 years 20-30% underwater... then this legislation sounds great!

Love the quote below:
*******
"This is a far more practical way to start to scale back the influence and costs of tax expenditures in the code by kind of glopping them together and capping them," MacGuineas said. "You're not picking the winners and losers."
*****

The losers are clear.... the middle class homebuyers in the past 10 years in big cities (an endangered species). What happened to only increasing taxes on those making over $250K? This legislation would crush housing prices in the $300-500K price range all over big cities.

Comments 1-17 of 17     Last »

LAO   Fri, 18 Nov 2011, 7:20am PST   Share   Quote   Permalink   Like   Dislike     Comment 1

Here's a better description of what Toomey's plan involves...

Tax cuts for those making over $200K a year...
Higher taxes for everyone else. And the biggest tax increase for those families making $100K-$200K a year...

http://www.pgdc.com/pgdc/toomey-plan-would-reduce-itemized-deductions-75-percent

It's basically taking every tax break away from the households in the $100K-200K income levels... And giving them no benefit in return.

¥   Fri, 18 Nov 2011, 7:30am PST   Share   Quote   Permalink   Like   Dislike     Comment 2

LOL.

At this point I'm rooting for the conservatives.

Let's just shoot this puppy in the head already.

corntrollio   Fri, 18 Nov 2011, 7:33am PST   Share   Quote   Permalink   Like   Dislike     Comment 3

Los Angeles Owner says

This legislation would crush housing prices in the $300-500K price range all over big cities.

Why would it "crush" prices? Prices would slowly adjust as the weakest of the herd who bought on thin margins were forced to sell. The housing market is highly illiquid and slow moving. This wouldn't crush anything because it would take a while for prices to adjust. It's a good thing overall -- the mortgage interest deduction is a big distortion in housing costs and is highly regressive.

Los Angeles Owner says

They're top bracket of 25% will remain unchanged.
[sic]

Wrong. The Toomey plan proposes to lower the top 35% bracket to 28% and the 10% bracket to 8%, and to adjust the other brackets too. In many ways, this is the Reagan plan further broadened -- close loopholes and lower overall rates.

See:
http://www.businessweek.com/ap/financialnews/D9R2S8U00.htm

Los Angeles Owner says

What happened to only increasing taxes on those making over $250K?

That was Obama's plan. Toomey's plan lowers the threshold from Obama's $200K/$250K thresholds, which are largely derived from Clinton's tax brackets:

A GOP congressional aide said the plan is designed to raise taxes on households in the top two tax brackets. That would affect individuals making more than $174,400 and married couples making more than $212,300.

The Toomey plan also plans some budgetary tricks:

An additional $40 billion would be raised by using a new measure of inflation to adjust the tax brackets each year. Annual adjustments to the tax brackets would be smaller, resulting in more people jumping into higher tax brackets as their incomes rise.

I'll have to see more details and a non-partisan analysis before determining more.

Los Angeles Owner says

It's basically taking every tax break away from the households in the $100K-200K income levels... And giving them no benefit in return.

Did you even read your own link?

_____________________________________________________________________
2011/12 Tax Rates 2013 and Beyond Tax Rates Rates under Toomey Proposal
35 39.6 28
33 36 27
28 31 23
25 28 20
15 15 12
10 N/A 8

The family you described would get a 5% reduction in tax rate at the top bracket, and 2% and 3% for lower brackets.

(sorry if my HTML formatting looks like ass -- I tried)

If you'd like to compare to Reagan, his initial plan was something like this -- not sure what year this is:
Married Filing Jointly
Marginal Tax Brackets
Tax Rate Over But Not Over
0.0% $0 $3,670
11.0% $3,670 $5,940
12.0% $5,940 $8,200
14.0% $8,200 $12,840
16.0% $12,840 $17,270
18.0% $17,270 $21,800
22.0% $21,800 $26,550
25.0% $26,550 $32,270
28.0% $32,270 $37,980
33.0% $37,980 $49,420
38.0% $49,420 $64,750
42.0% $64,750 $92,370
45.0% $92,370 $118,050
49.0% $118,050 $175,250
50.0% $175,250 -

Then there was a transitional period in 1986 and 1987 where it was 11/15/28/35/38.5, where the maximum capital gains tax rate was 28%. 38.5% is 10% higher than 35%. Clinton later used this trick too -- the 39.6% bracket is 10% higher than 36%.

Then in 1988 until the Bush I tax increases, it was 15/28/33/28. The 33 is because there was a 5% surcharge on earners in particular brackets to compensate for the 15% bracket and also to deal with the phaseout of personal exemptions.

Then Bush I raised it to 15/28/31. Then Clinton created two higher brackets in 1994: 1) at $115K for single and $140K for MFJ (the 36% bracket), 2) at $250K for single and MFJ (39.6%) bracket.

The Obama plan adjusted the $115/140K bracket for inflation to $200/250K at 36% and likely would have re-created the 39.6% bracket at about $400K (which is about $250K adjusted for inflation from 1994).

FortWayne   Fri, 18 Nov 2011, 7:47am PST   Share   Quote   Permalink   Like   Dislike     Comment 4

I don't think there should be mortgage interest deduction anyway. This handout needs to go away.

¥   Fri, 18 Nov 2011, 8:00am PST   Share   Quote   Permalink   Like   Dislike     Comment 5

corntrollio says

Why would it "crush" prices?

For someone making $125,000, it looks like the bracket drops will decrease taxes by $5000.

But then if you add the lost MID ($16,000) and health insurance exclusion ($6000+) the tax cut disappears, and along with it any tax advantage paying mortgage interest.

Which is sorta fine by me, save for the fact that housing is nothing but a sea of rent-seeking sharks right now, and this will make it worse, as all the money at the top just gets multiplied and buys up more "income properties".

corntrollio   Fri, 18 Nov 2011, 9:13am PST   Share   Quote   Permalink   Like   Dislike     Comment 6

Bellingham Bill says

For someone making $125,000, it looks like the bracket drops will decrease taxes by $5000.
But then if you add the lost MID ($16,000) and health insurance exclusion ($6000+) the tax cut disappears, and along with it any tax advantage paying mortgage interest.

That would hardly "crush" prices.

Assuming $16,000 for MID (not sure where you got that number, but I will use it), then maybe you are losing $3200 in federal tax in the now-20% bracket. For the health insurance exclusion, if you are losing $6000 in excluded money, then you are paying now 20% taxes on that, which is $1200.

What Bill forgot is California state tax deduction. That'd be another, let's say $9K (assuming both husband and wife work), which means you are losing another $1800 to that.

But, you have to include the itemized deduction cap of 2%, which is $2500, so $500 is 20% of that.

So by Bill's numbers:

$5000 gained by tax rate decrease
deduction is reduced by $3200+$1200+1800-$500 = $5700.

You are net negative $700 by Bill's numbers. If that kills you with respect to housing, you didn't deserve to own a house.

¥   Fri, 18 Nov 2011, 10:28am PST   Share   Quote   Permalink   Like   Dislike     Comment 7

corntrollio says

(not sure where you got that number, but I will use it)

$400,000 x 4%

corntrollio says

If that kills you with respect to housing, you didn't deserve to own a house.

All houses are bought on the margin, and removing the MID completely tears the guts out of my rent vs. buy spreadsheet. : )

LAO   Fri, 18 Nov 2011, 11:07am PST   Share   Quote   Permalink   Like   Dislike     Comment 8

Comment taken outside by errc. View

B.A.C.A.H.   Fri, 18 Nov 2011, 2:32pm PST   Share   Quote   Permalink   Like   Dislike     Comment 9

Bellingham Bill says

All houses are bought on the margin

You sure about that?

¥   Fri, 18 Nov 2011, 2:52pm PST   Share   Quote   Permalink   Like   Dislike     Comment 10

^ For owner-occupied, sure.

corntrollio   Mon, 21 Nov 2011, 3:26am PST   Share   Quote   Permalink   Like   Dislike     Comment 11

Bellingham Bill says

All houses are bought on the margin, and removing the MID completely tears the guts out of my rent vs. buy spreadsheet. : )

At least until prices eventually come down a bit to compensate.

TechGromit   Mon, 21 Nov 2011, 3:48am PST   Share   Quote   Permalink   Like   Dislike     Comment 12

Los Angeles Owner says

So let's say a dual income LA family makes $110K a year.. They have a $340K mortgage.. high, but reasonable 3x income. They are probably seeing about $4K-5K in mortgage interest deduction a year currently... if you included $14K in interest payments at 4%... $5K in property taxes...

So that's $19K.. (well above standard deduction)... $19K x 25% = $4750 tax refund.

I'm not quite sure where your getting your figures from, but some of those numbers are pretty close to my situation. 340k mortgage at 4.99% interest rate, $7,500 in property taxes and around 110k dual income, but I certain didn't get a $4,750 tax refund. My refund was less then $1,000, and that was after a W-4 form of zero deductions plus an extra $20 to be taken out every week. I've since raised it to $40 a paycheck. I wife claims 1 deduction on her W-4 form.

TechGromit   Mon, 21 Nov 2011, 3:59am PST   Share   Quote   Permalink   Like   Dislike     Comment 13

corntrollio says

If you'd like to compare to Reagan, his initial plan was something like this -- not sure what year this is:
Married Filing Jointly
Marginal Tax Brackets
Tax Rate Over But Not Over

I don't think you can fairly compare one plan based on incomes from 25 years ago to current plans. Minimum wage was $3.35 an hour in 1986, that's about 7k a year under Reagan's tax plan (12% bracket), Today minimum wage is $7.25 an hour, or 15k a year, (16% bracket) If the same numbers hold true for middle class incomes making 100k+ a year today, would have been making about 50K in 1986.

My point is these salary thresholds probably would have been adjusted up for today's salaries if the same plan was introduced again today.

TPB   Mon, 21 Nov 2011, 5:19am PST   Share   Quote   Permalink   Like   Dislike     Comment 14

How about just stop spending money, and give all of the shinny shit back we can't afford?!?!

That's what Cities across the US are having to do. Why in the Fuck is the Federal Government any different. We're in a down economy, you can't tax people not making money. If there were any brilliant states men with economic sense in Washington, that could figure out successful ways to spend money to create real economic growth. That created "NEW" success stories, then I would be on the Mountain top yelling "Raise my Taxes NOW!".

But that's not the case. Every plan coming out of Washington only creates a buttress for the entrenchment of Corporate position in our Political system, and new small people will get crushed just you try.

Stop it already, stop with the taxes and stop with the Federal spending. And FIRST! Let's start by rolling back the Senators and Congress people's salary, and make it against the law for them to publish books while acting in an official Government capacity. Those books are just a front for crooked bribes, and pay offs for favors and deals. Nobody is reading these dimwitted BORES!

It goes down like this, don't raise my taxes and build a road to nowhere, so I can develop the wetlands in some out of the way location. And I will buy a truck load of your books, and donate them to charity. That is why the only place you can find those books is at school Book fairs, the books are then donated. They are useless trash after all.

Vote Ron Paul he'll save us ALL.

LAO   Mon, 21 Nov 2011, 5:54am PST   Share   Quote   Permalink   Like   Dislike     Comment 15

TechGromit says

I'm not quite sure where your getting your figures from, but some of those numbers are pretty close to my situation. 340k mortgage at 4.99% interest rate, $7,500 in property taxes and around 110k dual income, but I certain didn't get a $4,750 tax refund. My refund was less then $1,000, and that was after a W-4 form of zero deductions plus an extra $20 to be taken out every week. I've since raised it to $40 a paycheck. I wife claims 1 deduction on her W-4 form.

http://www.bankrate.com/calculators/mortgages/loan-tax-deduction-calculator.aspx

I actually just used TURBO TAX before i bought my home.. punched in my projected earnings for the year and got my tax deduction that way. (That $4750 deduction included the STATE tax deduction i believe too...so it wasn't all federal tax deduction).

You might be earning less of a refund because you and your wife's incomes are similar... Which under the current tax system causes a marriage penalty. My wife isn't working at the moment so under the current Bush Tax cuts we actually pay less taxes. screwed up i know.

One married earner making $100K will pay less taxes than a couple each earning $50K. Not sure what the savings are exactly. But i think it's like around $1000 take home last I calculated it.

corntrollio   Mon, 21 Nov 2011, 7:20am PST   Share   Quote   Permalink   Like   Dislike     Comment 16

TechGromit says

but I certain didn't get a $4,750 tax refund. My refund was less then $1,000, and that was after a W-4 form of zero deductions plus an extra $20 to be taken out every week. I've since raised it to $40 a paycheck. I wife claims 1 deduction on her W-4 form.

You can't really compare your refund to any else's without normalizing for conditions, as you rightfully pointed out by telling us what you put on your W-4.

Furthermore, it is good to minimize your refund so as not to loan money to the federal government without compensation. I routinely underpay my taxes by paying the minimum I'm allowed to pay without incurring penalties and then true up in April for this reason.

TechGromit says

I don't think you can fairly compare one plan based on incomes from 25 years ago to current plans. Minimum wage was $3.35 an hour in 1986, that's about 7k a year under Reagan's tax plan (12% bracket), Today minimum wage is $7.25 an hour, or 15k a year, (16% bracket) If the same numbers hold true for middle class incomes making 100k+ a year today, would have been making about 50K in 1986.
My point is these salary thresholds probably would have been adjusted up for today's salaries if the same plan was introduced again today.

Well, obviously, they would have to be adjusted for inflation -- our tax system already does that. For the old Reagan brackets from pre-1986, it's not even worth thinking about what the inflation-adjusted amounts are, so I didn't do the math. I was just trying to point out what the brackets were pre-1986 and to show that there were far more than 4-6, and they covered a wide range of percentages.

For Clinton vs. Obama, I pointed out what the inflation-adjusted amount would be -- the reason Obama got $200K and $250K in his head is because that's basically the inflation-adjusted Clinton bracket for 36%, and then the 39.6% bracket would probably be set at $400K.

Daytona   Mon, 21 Nov 2011, 8:32am PST   Share   Quote   Permalink   Like   Dislike     Comment 17

Before anyone gets all worked up over this, remember this is Toomey's plan. It's pretty much irrelevant in this politcal enviroment.

There's just so many plans out there but nothing gains traction anyway.

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