Effects of New Tax Legislation

by Tolbert Rowe

I must confess that I was not very confident that POTUS Trump and the Republican Congress could align their political self-interests enough to pass major tax reform legislation. Seems some Republicans have a “poison pill” position that threatens to derail a major initiative. I was terribly wrong, and I admit it.

And if you cast aside all the hype around massive reduction in corporate taxes, that, according to some, will only enrich the “rich”, you can quickly see that big changes are going into effect in 2018 that will be a huge benefit for middle and lower income taxpayers. At least until they are set to expire in 2025. Of course, the lowering of corporate tax rates are permanent.

Tax reform takes away the exemption per dependent that was set to go to $4,150 in 2018 but, in return, the standard deduction has been doubled; from $6,000 to $12,000 for single taxpayers and from $12,000 to $24,000 for married filers; more than offsetting the loss for all but families of 4 or more.

For those that do itemize the deduction for property taxes and state and local taxes has been limited to $10,000. This limit will have the most significant impact on those living in high tax states with higher real estate values. Most taxpayers will not be affected by this change or the change in interest deduction where mortgage interest can be deducted on up to $750,000 of new acquisition debt for homes purchased after December of 2017.

For families with children under age 17 at the end of the tax year, the child tax credit has been doubled from $1,000 to $2,000 per child. It is important to note that the child tax credit is a credit against taxes owed not a reduction in taxable income. This is different from the standard deduction in that the standard deduction lowers the income that your taxes are calculated against and does not lower the actual taxes due.

An example: You are a family of four with two children and your gross income is $70,000, using the new tax tables, the Federal Tax due is $8,019. You are not itemizing so you take the standard deduction of $24,000 lowering taxable income to $46,000 and lowering Federal Tax due to $5,139 saving you $2,880.

The real gift to families with children, in this example two children, is the child tax credit lowers the actual tax liability by $4,000 ($2,000 per child) from $5,139 to $1,139. The liability would be lowered by $2,000 under the old tax guidelines to $3,139 saving an additional $2,000 in taxes due.

An added benefit to the Child Tax credit is that it is now refundable up to $1,400 per child. This means that you can receive a refund even though you have no tax liability. Assume in our example the family has four children instead of two and the child tax credit totals $8,000. We calculated that their tax liability was $5,139 before the tax credit. With four children the total credit is $8,000 which exceeds the taxes due by $2,861.

This family not only would have no tax liability and receive a refund of all Federal Tax withheld, they would also be able to receive the $2,861 surplus created by utilizing the full deduction. Not bad when you consider they probably had $6,000 to $7,000 withheld from their wages during the year under the old tax withholding tables.

In addition to all of these changes, the income levels in the tax brackets are increased so that more of a taxpayer’s income is included at the lower tax rate. It seems the biggest complaint for those against tax reform is that it benefits the rich and not the middle or lower classes of workers. I suggest to those who are gainfully employed and receiving a paycheck to wait and see what happens to your take home pay by the end of February.

POTUS Trump has directed employers to begin using the new withholding tables by the middle of February. Many of you may have noticed an increase in your take home pay by the time you read this. If not, wait until late February and you will.

Paying for all of this reduction in tax revenue will be the 800 pound gorilla in the room. Initially, our national budget deficit will increase tremendously but allegedly will slowly be decreased by an increase in tax revenue from all the new jobs and higher wages being created and paid for from a booming economy and corporations investing their tax savings in ways that generates more tax revenue. For now we just have to invest our tax savings wisely, assuming we really do notice a difference.

One thing I believe tax reform will do is stimulate more homeownership not decrease it as some have predicted. It seems the national press tends to focus on the impact of tax reform in higher priced areas where first time home buyers will spend upwards of $700,000 for a “starter” home with property taxes of $8,000 per year, like California. To them, real estate values will plummet in reaction to limiting deductibility of mortgage to under $750,000 in acquisition cost, and property taxes to $10,000 including state income and local taxes. This is not a big problem for us in Caroline County or most of the Eastern Shore and, I would suggest, most of Maryland.

As a matter of fact, recent data shows that the assessed values for residential properties in the southern end of Caroline County increased 11% from their last assessment in 2015. This 11% increase is the second highest percentage increase in Maryland behind Prince George’s County that increased 21.4%. Queen Anne County was close behind in third place behind Caroline at 8.8%. Dorchester decreased 6.1% and Talbot decreased 1.8%.

The value of assessments is the basis for much of what our county relies upon to fund local government. Although an increase in assessment is a positive for the direction that values are going it also can be a reflection of an increase in taxable assets, or new construction. Since the value of land is enhanced when there are improvements made to that land i.e.: new buildings, the amount of tax revenue will also increase because of the improvements on that property. Property taxes are calculated on the value of land with all improvements thereon.

For current owners in Caroline County it is comforting to know that the value of your home is more likely to have increased. I have been saying for a while that values for residential homes in Caroline have been going up in most all price ranges for the past year to year and a half.
If you currently own your home and have been considering selling or refinancing, now is the time to call and find out if you can benefit from this increase in values and low interest rates, especially if you purchased your home and paid mortgage insurance or are paying an interest rate higher than 4.5% to 5%.
If you find that your take home pay increases substantially, you should call me to discuss options of refinancing to a shorter term mortgage and not only save interest, but also reduce the number of years of having to pay a mortgage. Remember, the paying off of your mortgage should be a significant factor in retirement planning. Your mortgage is a critical part of your retirement plan. Or should I say, not having a mortgage is your retirement plan, and paying it off long before retirement is the best plan.

For first time homebuyers the new tax law can be the kick in the budget needed to make purchasing your first home a little easier. Since you pay your mortgage payment with after tax income, having less in taxes withheld from your pay leaves more funds available for a mortgage payment. With interest rates still at or below 4% for a fixed 30 year mortgage, and no down payment necessary with Rural Development loans buying a home can be easier than you think.

The Tax Reform Act of 2017 was a partisan political effort. Proposed and passed by Republicans, voted against by all Democrats; the details show that over 80% will pay less in taxes. POTUS has directed all employers to adjust withholdings in paychecks by the 16th of February. I would like to monitor its impact on your paycheck by asking you, if your employer withholds taxes, to let me know by email (tolbert@baycapitalmortgage.com) if your take home pay has increased. I will report back based on responses. This will not necessarily be a scientific study but it will indicate whether tax reform actually did lower our tax liability. It is a worthy goal to allow taxpayers the benefit of keeping more of our hard earned income, and putting less in the hands of the Federal Government.

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