Tax reform SALT affecting in Bay Area?

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schrute
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Tax reform SALT affecting in Bay Area?

Post by schrute » Sun Feb 25, 2018 11:17 pm

If you live in the Bay Area, are the tax reforms to SALT affecting you? As I understand property taxes and state taxes are capped. Also, home office deductions are out now. I heard some people $20,000-$40,000+ and now that will now be capped at $10,000. In the future, would like to buy a house and trying to see how this would affect.

mega317
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Re: Tax reform SALT affecting in Bay Area?

Post by mega317 » Mon Feb 26, 2018 1:10 am

Yeah I think lots of people in California are affected. If you're considering a house in the bay area I don't think the ability to deduct property tax would realistically change the calculus much.

visualguy
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Re: Tax reform SALT affecting in Bay Area?

Post by visualguy » Mon Feb 26, 2018 1:19 am

People with large SALT were typically hit by AMT, so the impact of the SALT deduction changes isn't really as significant and widespread as one would think.

BusterMcTaco
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Re: Tax reform SALT affecting in Bay Area?

Post by BusterMcTaco » Mon Feb 26, 2018 1:42 am

visualguy wrote:
Mon Feb 26, 2018 1:19 am
People with large SALT were typically hit by AMT, so the impact of the SALT deduction changes isn't really as significant and widespread as one would think.
I've thought about this, but this isn't necessarily true. Just because one "hits AMT" doesn't mean that the loss of the SALT deduction wouldn't raise their standard taxes considerably, especially if the AMT tax was very low.

For example, in 2017 I hit AMT to the tune of $5,132 (so not insignificantly). I have a home office so this is a bit complicated (because I'm not sure how the $10,000 SALT cap will work with the home office), but if I just remove all my state tax paid and cap my property tax at $10,000, my tax would have (theoretically) gone up by $3,613 (it took me a long time to figure out why this wasn't happening--I have a rather large AMT credit carryover which was then getting applied by TT!)

Anyway, in my case (high income, high property taxes), the new law would have actually kicked me out of AMT by increasing my standard taxes, and I would have owed another $3,613. Of course, I'm saved by the new and improved tax rates (and the Section 199A deduction).

My standard taxes went up by $8,745. $5,132 of that was eaten up by the difference with AMT, and the remaining $3,613 would have been due (if not for my large AMT credit from prior years).

HornedToad
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Re: Tax reform SALT affecting in Bay Area?

Post by HornedToad » Mon Feb 26, 2018 2:25 am

SALT raises taxable income by capping $35-40k in taxes to $10k. Lower tax brackets lowered total tax that was due.

All in all for me it was a tax savings, it just makes it that it would have been much more of a tax savings as a renter.

ryman554
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Re: Tax reform SALT affecting in Bay Area?

Post by ryman554 » Mon Feb 26, 2018 9:38 am

visualguy wrote:
Mon Feb 26, 2018 1:19 am
People with large SALT were typically hit by AMT, so the impact of the SALT deduction changes isn't really as significant and widespread as one would think.
I've done some forecasting, and it appears as if the AMT and SALT deduction reduction just about balance out. I *think* I owe less this year, but I'm making more so it's hard to suss out. I'm certainly getting a boost on my paycheck monthly from the lower rates, but I worry about the reckoning April 15, 2019.

Oh, what I can tell you is that it looks to be having little to no impact on the housing frenzy around here. Take that as an empirical data point, to the point where now may be a proper time to cash out for me.

e5116
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Re: Tax reform SALT affecting in Bay Area?

Post by e5116 » Mon Feb 26, 2018 10:47 am

I don't think many buyers think when contemplating a purchase: "Oh, I can only afford this $1.2M house because I can fully deduct the $25k in property taxes." So, while it could conceivably impact the financial figures for individuals, I doubt it impacts the buyer pool and I don't think mortgage companies really took that into consideration either when deciding to approve people for loans. So, I'd agree that the impact is probably negligible except it's possible that the SALT cap may push some to stay renters or not get married (to double their SALT deductions) or something along those lines. It does help renters financially more, but I think most people choose to buy for lifestyle purposes anyways.

There was a report coming out from some Realtor Association though, that did forecast by region the impact of the SALT cap, and I think it said that nationwide, it would cause a 2-3% decrease (NOT that home prices would go down 2-3%, but rather the home appreciation would be 2-3% less than had no cap been implemented). In some states/cities, that forecasted impact was larger than others (namely, high tax states/cities). Of course, nobody can forecast such things perfectly.

visualguy
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Re: Tax reform SALT affecting in Bay Area?

Post by visualguy » Mon Feb 26, 2018 11:02 am

Ryman554 - Just don't cash out simply because you think it's "the top", particularly if you are in the core parts of the Bay Area where prices tend to hold up even in recession. I wouldn't sell an asset there unless I really needed the money or had to get rid of the mortgage. Even when moving out of the area, I would just rent it out and continue riding the appreciation while collecting some income from it.

schrute
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Re: Tax reform SALT affecting in Bay Area?

Post by schrute » Mon Feb 26, 2018 12:25 pm

HornedToad wrote:
Mon Feb 26, 2018 2:25 am
SALT raises taxable income by capping $35-40k in taxes to $10k. Lower tax brackets lowered total tax that was due.

All in all for me it was a tax savings, it just makes it that it would have been much more of a tax savings as a renter.
I'm renting right now, but always thinking about "the day" could buy. In that case, I wonder how much buying affects versus renting. I know I'll go down a bracket with the tax reform with my income...

schrute
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Re: Tax reform SALT affecting in Bay Area?

Post by schrute » Mon Feb 26, 2018 12:30 pm

BusterMcTaco wrote:
Mon Feb 26, 2018 1:42 am
visualguy wrote:
Mon Feb 26, 2018 1:19 am
People with large SALT were typically hit by AMT, so the impact of the SALT deduction changes isn't really as significant and widespread as one would think.
I've thought about this, but this isn't necessarily true. Just because one "hits AMT" doesn't mean that the loss of the SALT deduction wouldn't raise their standard taxes considerably, especially if the AMT tax was very low.

For example, in 2017 I hit AMT to the tune of $5,132 (so not insignificantly). I have a home office so this is a bit complicated (because I'm not sure how the $10,000 SALT cap will work with the home office), but if I just remove all my state tax paid and cap my property tax at $10,000, my tax would have (theoretically) gone up by $3,613 (it took me a long time to figure out why this wasn't happening--I have a rather large AMT credit carryover which was then getting applied by TT!)

Anyway, in my case (high income, high property taxes), the new law would have actually kicked me out of AMT by increasing my standard taxes, and I would have owed another $3,613. Of course, I'm saved by the new and improved tax rates (and the Section 199A deduction).

My standard taxes went up by $8,745. $5,132 of that was eaten up by the difference with AMT, and the remaining $3,613 would have been due (if not for my large AMT credit from prior years).
Just curious, how much does a home office deduction help?

TIAX
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Re: Tax reform SALT affecting in Bay Area?

Post by TIAX » Mon Feb 26, 2018 12:31 pm

schrute wrote:
Sun Feb 25, 2018 11:17 pm
If you live in the Bay Area, are the tax reforms to SALT affecting you? As I understand property taxes and state taxes are capped. Also, home office deductions are out now. I heard some people $20,000-$40,000+ and now that will now be capped at $10,000. In the future, would like to buy a house and trying to see how this would affect.
I believe the home office deduction is still available if you own the business. It has been repealed for employees (and was hard to claim anyway).

TIAX
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Re: Tax reform SALT affecting in Bay Area?

Post by TIAX » Mon Feb 26, 2018 12:33 pm

HornedToad wrote:
Mon Feb 26, 2018 2:25 am
SALT raises taxable income by capping $35-40k in taxes to $10k. Lower tax brackets lowered total tax that was due.

All in all for me it was a tax savings, it just makes it that it would have been much more of a tax savings as a renter.
If this is actually true, why not sell your house and rent?

HornedToad
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Re: Tax reform SALT affecting in Bay Area?

Post by HornedToad » Mon Feb 26, 2018 1:49 pm

TIAX wrote:
Mon Feb 26, 2018 12:33 pm
HornedToad wrote:
Mon Feb 26, 2018 2:25 am
SALT raises taxable income by capping $35-40k in taxes to $10k. Lower tax brackets lowered total tax that was due.

All in all for me it was a tax savings, it just makes it that it would have been much more of a tax savings as a renter.
If this is actually true, why not sell your house and rent?
All the normal reasons you would buy a house. Just because the government is not subsidizing home ownership as much now as it did before the tax reform doesn't mean home ownership still isn't desirable. For me, it's a difference of like $5-$6k total in tax savings difference. Owning a home could easily be worth that if you want to own a home considering price appreciation, principal paydown, and general stability of owning a house.

ryman554
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Re: Tax reform SALT affecting in Bay Area?

Post by ryman554 » Mon Feb 26, 2018 4:06 pm

visualguy wrote:
Mon Feb 26, 2018 11:02 am
Ryman554 - Just don't cash out simply because you think it's "the top", particularly if you are in the core parts of the Bay Area where prices tend to hold up even in recession. I wouldn't sell an asset there unless I really needed the money or had to get rid of the mortgage. Even when moving out of the area, I would just rent it out and continue riding the appreciation while collecting some income from it.
Not selling because it's the top. I can't predict that.

I can see an inflection point coming, but that's just a guess.

What I can see is the 500k exclusion being blown through for me. This appreciation is now less than 70 cents on the dollar.

Plus, my wife hates thsi place.

I would never be a remote landlord.... With a PITI of > $4k, it is hard to see a good ROI.

selling seems....attractive

mac808
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Re: Tax reform SALT affecting in Bay Area?

Post by mac808 » Mon Feb 26, 2018 4:11 pm

My guess in Dec 2017 was that mass market behaviors won't change until 2018 tax returns are filed at the earliest, so another 12+ months away. Conversations with friends in CA and NJ have reinforced this view. People complain but the real pain signals are still ambling up the nerves to the brain, so to speak. The economy is still red hot and everybody is making boatloads of money which helps to mask the pain as well.

ralph124cf
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Re: Tax reform SALT affecting in Bay Area?

Post by ralph124cf » Mon Feb 26, 2018 6:16 pm

For most people in VHCOL areas, especially California, the State and local income taxes substantially outweigh the property taxes. Interest on the first $750k? of mortgage is still deductible. For these reasons I don't think that property prices will be much affected by the new tax law in these VHCOL areas. In an area with low state income taxes, but high property taxes, I expect a more noticeable effect.

Ralph

likashing
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Re: Tax reform SALT affecting in Bay Area?

Post by likashing » Tue Feb 27, 2018 12:22 am

Property tax isn't the biggest issue since most households who can afford the current price of $1m+++ homes make at least $250k+ anyway, and they were already in AMT which means property taxes were already non-deductible due to AMT.

The bigger issue is the $24k standard deduction, and $10k SALT cap, which means the first $14k mortgage interest deduction goes to fill the gap between $10k and $24k, which you are getting anyway regardless whether you have a mortgage or not. Pre-2018, every cent of mortgage interest were deductible for these buyers, and makes their effective interest rate much lower.

2018-on, their effective interest rate is much higher. My estimate is roughly 0.75% more than pre-2018. Combined with the current 30-year fixed rate of roughly 4.5% (compared to ~3.5% last year), the current effective interest rate is much more than last year.

Of course, a lot of people are ignorant and don't know about it until filing 2018 tax, or they will just buy anyway and wish for the best.

For households that already have a small mortgage, $250k+ income, and with kids, 2018-tax is extremely beneficial because they can take the $24k standard deduction, have no more AMT, and enjoy the new $2k per child tax credit which they were phased out before.

madbrain
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Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Tue Feb 27, 2018 1:47 am

visualguy wrote:
Mon Feb 26, 2018 1:19 am
People with large SALT were typically hit by AMT, so the impact of the SALT deduction changes isn't really as significant and widespread as one would think.
Simply not true. I have only ever paid AMT once in 22 years due to a generous severance package - and got it all refunded the next year.

The combination of the $10K SALT deduction limit and removal of personal exemptions will cost me $5000 extra in taxes this year, corresponding to a 25% increase in our federal taxes.

We had $38k of itemized deductions that will turn to $24k standard deduction. And loss of $8k in personal exemptions. That's $22k in extra taxable income. Absolutely nothing in tax reform makes up for this since we have no children, so no child tax credit.

Also, I haven't had a raise at work in 4 years, and that's for not asking or trying to get a better job. We are a single earner family. This will really squeeze us and interfere with our savings plan. That said, we are not selling the house because of it. But if we were in the market, it would make us think twice about the range we could afford to buy - just like higher interest rates would.

madbrain
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Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Tue Feb 27, 2018 2:12 am

TIAX wrote:
Mon Feb 26, 2018 12:33 pm
HornedToad wrote:
Mon Feb 26, 2018 2:25 am
SALT raises taxable income by capping $35-40k in taxes to $10k. Lower tax brackets lowered total tax that was due.

All in all for me it was a tax savings, it just makes it that it would have been much more of a tax savings as a renter.
If this is actually true, why not sell your house and rent?

A renter would see more of a tax savings, but housing costs for comparable housing would likely be higher as a renter, especially in CA due to Prop 13. And the difference in housing costs would be greater than the difference in tax savings.

A lot of people already hold on to their homes mainly because of Prop 13, and that is likely to be even more so now since buying a new home would entail a substantial increase in non-deductible property taxes. Thus, you might continue to see low housing inventory for sale in CA. But of course if a major recession hits, all bets are off.

Leemiller
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Re: Tax reform SALT affecting in Bay Area?

Post by Leemiller » Tue Feb 27, 2018 8:19 am

I’ve seen a report from a major rating agency that expects a modest drop in housing prices in certain markets as a result of the tax reform. A couple of percent so nothing major. Makes sense since deductibility is absolutely a considering for buyers.

mrsbetsy
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Re: Tax reform SALT affecting in Bay Area?

Post by mrsbetsy » Tue Feb 27, 2018 9:51 am

Not us because of Prop 13, which only allows property taxes to go up by a maximum of 2% per year. We bought in 2000 and our property tax on a house valued at 1.3M is less than 7K a year.

I do wonder when we sell in a couple of years if it will have any effect at all on the market. So far, it's still a sellers market with multiple offers to choose from and a bidding war -- at least in our east bay city. But as the reality hits, who knows.

desi_kalle
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Re: Tax reform SALT affecting in Bay Area?

Post by desi_kalle » Tue Feb 27, 2018 1:51 pm

madbrain wrote:
Tue Feb 27, 2018 1:47 am
visualguy wrote:
Mon Feb 26, 2018 1:19 am
People with large SALT were typically hit by AMT, so the impact of the SALT deduction changes isn't really as significant and widespread as one would think.
Simply not true. I have only ever paid AMT once in 22 years due to a generous severance package - and got it all refunded the next year.
He did say "typically" so I would say his statement is true. Your situation is more of an outlier than typical.
madbrain wrote:
Tue Feb 27, 2018 1:47 am
The combination of the $10K SALT deduction limit and removal of personal exemptions will cost me $5000 extra in taxes this year, corresponding to a 25% increase in our federal taxes.

We had $38k of itemized deductions that will turn to $24k standard deduction. And loss of $8k in personal exemptions. That's $22k in extra taxable income. Absolutely nothing in tax reform makes up for this since we have no children, so no child tax credit.
What about the expanded tax brackets in the tax reform bill? That should reduce your tax liability a bit.

boglesmind
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Re: Tax reform SALT affecting in Bay Area?

Post by boglesmind » Tue Feb 27, 2018 2:19 pm

desi_kalle wrote:
Tue Feb 27, 2018 1:51 pm
madbrain wrote:
Tue Feb 27, 2018 1:47 am
visualguy wrote:
Mon Feb 26, 2018 1:19 am
People with large SALT were typically hit by AMT, so the impact of the SALT deduction changes isn't really as significant and widespread as one would think.
Simply not true. I have only ever paid AMT once in 22 years due to a generous severance package - and got it all refunded the next year.
He did say "typically" so I would say his statement is true. Your situation is more of an outlier than typical.
madbrain wrote:
Tue Feb 27, 2018 1:47 am
The combination of the $10K SALT deduction limit and removal of personal exemptions will cost me $5000 extra in taxes this year, corresponding to a 25% increase in our federal taxes.

We had $38k of itemized deductions that will turn to $24k standard deduction. And loss of $8k in personal exemptions. That's $22k in extra taxable income. Absolutely nothing in tax reform makes up for this since we have no children, so no child tax credit.
What about the expanded tax brackets in the tax reform bill? That should reduce your tax liability a bit.
We've paid AMT most of the time last decade due to high state income and property taxes. Nevertheless our tax bill does go up *significantly* in 2018 due to capping of SALT.

Boglesmind

likashing
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Re: Tax reform SALT affecting in Bay Area?

Post by likashing » Tue Feb 27, 2018 2:36 pm

madbrain wrote:
Tue Feb 27, 2018 1:47 am
visualguy wrote:
Mon Feb 26, 2018 1:19 am
People with large SALT were typically hit by AMT, so the impact of the SALT deduction changes isn't really as significant and widespread as one would think.
Simply not true. I have only ever paid AMT once in 22 years due to a generous severance package - and got it all refunded the next year.

The combination of the $10K SALT deduction limit and removal of personal exemptions will cost me $5000 extra in taxes this year, corresponding to a 25% increase in our federal taxes.

We had $38k of itemized deductions that will turn to $24k standard deduction. And loss of $8k in personal exemptions. That's $22k in extra taxable income. Absolutely nothing in tax reform makes up for this since we have no children, so no child tax credit.

Also, I haven't had a raise at work in 4 years, and that's for not asking or trying to get a better job. We are a single earner family. This will really squeeze us and interfere with our savings plan. That said, we are not selling the house because of it. But if we were in the market, it would make us think twice about the range we could afford to buy - just like higher interest rates would.
What was your household income and property tax? In the Bay Area, anyone paying high property taxes (i.e. house not bought long ago benefiting from Prop 13), and with a decent income (i.e. high state tax), pays AMT.

Also, the tax bracket is more beneficial 2018-on.

schrute
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Re: Tax reform SALT affecting in Bay Area?

Post by schrute » Tue Feb 27, 2018 3:32 pm

likashing wrote:
Tue Feb 27, 2018 12:22 am
Property tax isn't the biggest issue since most households who can afford the current price of $1m+++ homes make at least $250k+ anyway, and they were already in AMT which means property taxes were already non-deductible due to AMT.

The bigger issue is the $24k standard deduction, and $10k SALT cap, which means the first $14k mortgage interest deduction goes to fill the gap between $10k and $24k, which you are getting anyway regardless whether you have a mortgage or not. Pre-2018, every cent of mortgage interest were deductible for these buyers, and makes their effective interest rate much lower.

2018-on, their effective interest rate is much higher. My estimate is roughly 0.75% more than pre-2018. Combined with the current 30-year fixed rate of roughly 4.5% (compared to ~3.5% last year), the current effective interest rate is much more than last year.

Of course, a lot of people are ignorant and don't know about it until filing 2018 tax, or they will just buy anyway and wish for the best.

For households that already have a small mortgage, $250k+ income, and with kids, 2018-tax is extremely beneficial because they can take the $24k standard deduction, have no more AMT, and enjoy the new $2k per child tax credit which they were phased out before.
Do you think the reform applies on mortgages up to $750,000 in the Bay? Is that what you're defining as a "small mortgage"?

madbrain
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Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Tue Feb 27, 2018 3:44 pm

likashing wrote:
Tue Feb 27, 2018 2:36 pm
What was your household income and property tax? In the Bay Area, anyone paying high property taxes (i.e. house not bought long ago benefiting from Prop 13), and with a decent income (i.e. high state tax), pays AMT.

Also, the tax bracket is more beneficial 2018-on.
$13K property tax (house bought in 2010), about $190k household income. I guess you are saying that isn't a decent income in the bay area :(.

likashing
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Re: Tax reform SALT affecting in Bay Area?

Post by likashing » Tue Feb 27, 2018 5:16 pm

madbrain wrote:
Tue Feb 27, 2018 3:44 pm
likashing wrote:
Tue Feb 27, 2018 2:36 pm
What was your household income and property tax? In the Bay Area, anyone paying high property taxes (i.e. house not bought long ago benefiting from Prop 13), and with a decent income (i.e. high state tax), pays AMT.

Also, the tax bracket is more beneficial 2018-on.
$13K property tax (house bought in 2010), about $190k household income. I guess you are saying that isn't a decent income in the bay area :(.
Didn't mean that. Sorry if it sounded wrong. $190k is definitely a great income even in the crazy Bay Area. Maybe it is time to take advantage of the $2k per child tax credit =)

likashing
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Re: Tax reform SALT affecting in Bay Area?

Post by likashing » Tue Feb 27, 2018 5:25 pm

schrute wrote:
Tue Feb 27, 2018 3:32 pm
likashing wrote:
Tue Feb 27, 2018 12:22 am
Property tax isn't the biggest issue since most households who can afford the current price of $1m+++ homes make at least $250k+ anyway, and they were already in AMT which means property taxes were already non-deductible due to AMT.

The bigger issue is the $24k standard deduction, and $10k SALT cap, which means the first $14k mortgage interest deduction goes to fill the gap between $10k and $24k, which you are getting anyway regardless whether you have a mortgage or not. Pre-2018, every cent of mortgage interest were deductible for these buyers, and makes their effective interest rate much lower.

2018-on, their effective interest rate is much higher. My estimate is roughly 0.75% more than pre-2018. Combined with the current 30-year fixed rate of roughly 4.5% (compared to ~3.5% last year), the current effective interest rate is much more than last year.

Of course, a lot of people are ignorant and don't know about it until filing 2018 tax, or they will just buy anyway and wish for the best.

For households that already have a small mortgage, $250k+ income, and with kids, 2018-tax is extremely beneficial because they can take the $24k standard deduction, have no more AMT, and enjoy the new $2k per child tax credit which they were phased out before.
Do you think the reform applies on mortgages up to $750,000 in the Bay? Is that what you're defining as a "small mortgage"?
I don't completely understand your question. What I meant was for MFJ, the standard deduction is now $24k. There is a "gap" of $14k you need to fill up between $10k (SALT cap) and $24k (standard deduction you are getting anyway even if you don't have a mortgage). For most W2 workers, this $14k gap will be filled by mortgage interest (and donations).

$14k of mortgage interest at 4% equals to a principal of ~$350k.

What this means if that if your loan is below ~$350k (@ 4%), you will still be taking standard deduction, which means you are not getting any tax benefits to borrow money to buy a house. Your effective mortgage interest is still 4%, without any discount from IRS.

So, a "small" loan is roughly $350k (@ 4%) and below for this discussion. Obviously, this number changes depending on the rate of the loan.

If you borrow $750k (@ 4%), you will get some benefit from the IRS, but not as much as pre-2018.

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ray.james
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Re: Tax reform SALT affecting in Bay Area?

Post by ray.james » Tue Feb 27, 2018 5:39 pm

likashing wrote:
Tue Feb 27, 2018 5:25 pm
I don't completely understand your question. What I meant was for MFJ, the standard deduction is now $24k. There is a "gap" of $14k you need to fill up between $10k (SALT cap) and $24k (standard deduction you are getting anyway even if you don't have a mortgage). For most W2 workers, this $14k gap will be filled by mortgage interest (and donations).

$14k of mortgage interest at 4% equals to a principal of ~$350k.

What this means if that if your loan is below ~$350k (@ 4%), you will still be taking standard deduction, which means you are not getting any tax benefits to borrow money to buy a house. Your effective mortgage interest is still 4%, without any discount from IRS.

So, a "small" loan is roughly $350k (@ 4%) and below for this discussion. Obviously, this number changes depending on the rate of the loan.

If you borrow $750k (@ 4%), you will get some benefit from the IRS, but not as much as pre-2018.
+1, this is how I looked at this as well. It is not as compelling as before to buy a home.

Bottomline: The change in the rent vs buy equation is substantial. However, there is no substantial NEW burden for current home owners as taxes(/+brackets) are lower but these savings are(~were) going to house payment.
It is yet to be seen if inflation gears up and eats into the new found renters savings from tax changes.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

madbrain
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Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Tue Feb 27, 2018 5:47 pm

ray.james wrote:
Tue Feb 27, 2018 5:39 pm
However, there is no substantial NEW burden for current home owners as taxes(/+brackets) are lower but these savings are(~were) going to house payment.
It depends what you call substantial, but there is likely going to be some tax increase for many homeowners in California and other high-income tax states, even for people who are middle class.

schrute
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Re: Tax reform SALT affecting in Bay Area?

Post by schrute » Tue Feb 27, 2018 7:51 pm

likashing wrote:
Tue Feb 27, 2018 5:25 pm
schrute wrote:
Tue Feb 27, 2018 3:32 pm
likashing wrote:
Tue Feb 27, 2018 12:22 am
Property tax isn't the biggest issue since most households who can afford the current price of $1m+++ homes make at least $250k+ anyway, and they were already in AMT which means property taxes were already non-deductible due to AMT.

The bigger issue is the $24k standard deduction, and $10k SALT cap, which means the first $14k mortgage interest deduction goes to fill the gap between $10k and $24k, which you are getting anyway regardless whether you have a mortgage or not. Pre-2018, every cent of mortgage interest were deductible for these buyers, and makes their effective interest rate much lower.

2018-on, their effective interest rate is much higher. My estimate is roughly 0.75% more than pre-2018. Combined with the current 30-year fixed rate of roughly 4.5% (compared to ~3.5% last year), the current effective interest rate is much more than last year.

Of course, a lot of people are ignorant and don't know about it until filing 2018 tax, or they will just buy anyway and wish for the best.

For households that already have a small mortgage, $250k+ income, and with kids, 2018-tax is extremely beneficial because they can take the $24k standard deduction, have no more AMT, and enjoy the new $2k per child tax credit which they were phased out before.
Do you think the reform applies on mortgages up to $750,000 in the Bay? Is that what you're defining as a "small mortgage"?
I don't completely understand your question. What I meant was for MFJ, the standard deduction is now $24k. There is a "gap" of $14k you need to fill up between $10k (SALT cap) and $24k (standard deduction you are getting anyway even if you don't have a mortgage). For most W2 workers, this $14k gap will be filled by mortgage interest (and donations).

$14k of mortgage interest at 4% equals to a principal of ~$350k.

What this means if that if your loan is below ~$350k (@ 4%), you will still be taking standard deduction, which means you are not getting any tax benefits to borrow money to buy a house. Your effective mortgage interest is still 4%, without any discount from IRS.

So, a "small" loan is roughly $350k (@ 4%) and below for this discussion. Obviously, this number changes depending on the rate of the loan.

If you borrow $750k (@ 4%), you will get some benefit from the IRS, but not as much as pre-2018.
What was the pre-2018 benefit in terms of cost? Assuming most of it is the property taxes? Am I right to assume they're $28,000?

madbrain
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Location: San Jose, California

Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Tue Feb 27, 2018 8:03 pm

schrute wrote:
Tue Feb 27, 2018 7:51 pm
What was the pre-2018 benefit in terms of cost? Assuming most of it is the property taxes? Am I right to assume they're $28,000?
For me personally in 2016, it was about as below :
$12 property tax
$10k state income tax
$12k mortgage interest ("small" mortgage, about $320k at 3.375%)
$4k charitable deductions

total $38k itemized deductions
plus $8k personal exemptions

2017 tax year looks like this :
$19.5k property tax . Taxes went up, and I prepaid my first 2018 installment in december
$10k state income tax
$11k mortgage interest (that goes down over time as you pay off)
$0 charitable contributions

total $40.5k itemized deductions
plus $8k personal exemptions

2018 tax year will look roughly like this :
$6.6k property tax
$10k state income tax
$11k mortgage interest
probably <$3k charitable contributions
net result : standard deduction of $24k
plus $0 personal exemptions .
Ie. $22k extra taxable income vs tax year 2016, and $24k more taxable income than tax year 2017

if nothing else changes, 2019 will be as follows :
$13k property tax
$10k state income tax
$11k mortgage interest
probably <$3k charitable contributions
net result : standard deduction of $24k
plus $0 personal exemptions

Ie. $22k extra taxable income vs tax year 2016, and $24k more taxable income than tax year 2017

As time goes on, the property taxes go up, but their deductibility is already limited to $10K.
And as the mortgage interest gets paid down, it gets less and less likely that I would be able to itemize.

Borrowing against HELOC wouldn't help since interest is no longer deductible.

[OT comment removed by admin LadyGeek]

madbrain
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Location: San Jose, California

Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Tue Feb 27, 2018 9:45 pm

likashing wrote:
Tue Feb 27, 2018 5:16 pm
madbrain wrote:
Tue Feb 27, 2018 3:44 pm
likashing wrote:
Tue Feb 27, 2018 2:36 pm
What was your household income and property tax? In the Bay Area, anyone paying high property taxes (i.e. house not bought long ago benefiting from Prop 13), and with a decent income (i.e. high state tax), pays AMT.

Also, the tax bracket is more beneficial 2018-on.
$13K property tax (house bought in 2010), about $190k household income. I guess you are saying that isn't a decent income in the bay area :(.
Didn't mean that. Sorry if it sounded wrong. $190k is definitely a great income even in the crazy Bay Area. Maybe it is time to take advantage of the $2k per child tax credit =)
We are a same-sex couple and have never considered adopting. My husband and I agree on that.

Even if we changed our mind, the cost of raising children would far outweigh the child tax credit. We are already squeezed enough financially as it is with the prospect of how to cover our HIV care in retirement given the very uncertain direction this country has taken on healthcare lately.

I sure wish we could claim the 3 kittens we adopted last year, though ;) They are hungry angels.

The only good news is that my husband who hasn't worked for years started a new job today - I hope it lasts. It doesn't pay much and has no 401k, so about half his pay will go to taxes, but it will still make a difference.

pasadena
Posts: 173
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Re: Tax reform SALT affecting in Bay Area?

Post by pasadena » Tue Feb 27, 2018 10:48 pm

I'm in LA. Even being a renter, I will pay more, although I haven't made the exact calculation yet. The $10k limit on state taxes is barely made up for by the standard deduction/personal exemption change.

Then there is the fact that I'm going to go from a 28% marginal tax rate to 32% - nobody seem to have noticed that... the limit between 24%-32% is much lower than the one between 28%-33% was (~$157k vs ~185k for a single person).

schrute
Posts: 186
Joined: Wed Nov 05, 2014 2:27 pm

Re: Tax reform SALT affecting in Bay Area?

Post by schrute » Wed Feb 28, 2018 11:36 am

madbrain wrote:
Tue Feb 27, 2018 8:03 pm
schrute wrote:
Tue Feb 27, 2018 7:51 pm
What was the pre-2018 benefit in terms of cost? Assuming most of it is the property taxes? Am I right to assume they're $28,000?
For me personally in 2016, it was about as below :
$12 property tax
$10k state income tax
$12k mortgage interest ("small" mortgage, about $320k at 3.375%)
$4k charitable deductions

total $38k itemized deductions
plus $8k personal exemptions

2017 tax year looks like this :
$19.5k property tax . Taxes went up, and I prepaid my first 2018 installment in december
$10k state income tax
$11k mortgage interest (that goes down over time as you pay off)
$0 charitable contributions

total $40.5k itemized deductions
plus $8k personal exemptions

2018 tax year will look roughly like this :
$6.6k property tax
$10k state income tax
$11k mortgage interest
probably <$3k charitable contributions
net result : standard deduction of $24k
plus $0 personal exemptions .
Ie. $22k extra taxable income vs tax year 2016, and $24k more taxable income than tax year 2017

if nothing else changes, 2019 will be as follows :
$13k property tax
$10k state income tax
$11k mortgage interest
probably <$3k charitable contributions
net result : standard deduction of $24k
plus $0 personal exemptions

Ie. $22k extra taxable income vs tax year 2016, and $24k more taxable income than tax year 2017

As time goes on, the property taxes go up, but their deductibility is already limited to $10K.
And as the mortgage interest gets paid down, it gets less and less likely that I would be able to itemize.

Borrowing against HELOC wouldn't help since interest is no longer deductible.

[OT comment removed by admin LadyGeek]
Thanks, this is fantastic comparison to understand. It looks like you would pay an extra $5K in taxes?

DrGoogle2017
Posts: 1322
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Re: Tax reform SALT affecting in Bay Area?

Post by DrGoogle2017 » Wed Feb 28, 2018 12:08 pm

Our property tax is low for the house in the Bay Area. It wouldn’t affect us if we live there.

madbrain
Posts: 4929
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Wed Feb 28, 2018 4:50 pm

schrute wrote:
Wed Feb 28, 2018 11:36 am
Thanks, this is fantastic comparison to understand. It looks like you would pay an extra $5K in taxes?
Yes, that's roughly what it would be based on extra taxable income alone, but the new tax tables slightly make up for it, so it will likely be closer to around $3K more in taxes.

madbrain
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Location: San Jose, California

Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Wed Feb 28, 2018 4:52 pm

DrGoogle2017 wrote:
Wed Feb 28, 2018 12:08 pm
Our property tax is low for the house in the Bay Area. It wouldn’t affect us if we live there.
That's generally true if you bought it a long time ago due to Prop 13 . It still goes up over time, though.

hale2
Posts: 150
Joined: Sat Feb 15, 2014 5:54 pm

Re: Tax reform SALT affecting in Bay Area?

Post by hale2 » Thu Mar 01, 2018 3:23 pm

madbrain wrote:
Tue Feb 27, 2018 8:03 pm
schrute wrote:
Tue Feb 27, 2018 7:51 pm
What was the pre-2018 benefit in terms of cost? Assuming most of it is the property taxes? Am I right to assume they're $28,000?
For me personally in 2016, it was about as below :
$12 property tax
$10k state income tax
$12k mortgage interest ("small" mortgage, about $320k at 3.375%)
$4k charitable deductions

total $38k itemized deductions
plus $8k personal exemptions

2017 tax year looks like this :
$19.5k property tax . Taxes went up, and I prepaid my first 2018 installment in december
$10k state income tax
$11k mortgage interest (that goes down over time as you pay off)
$0 charitable contributions

total $40.5k itemized deductions
plus $8k personal exemptions

2018 tax year will look roughly like this :
$6.6k property tax
$10k state income tax
$11k mortgage interest
probably <$3k charitable contributions
net result : standard deduction of $24k
plus $0 personal exemptions .
Ie. $22k extra taxable income vs tax year 2016, and $24k more taxable income than tax year 2017

if nothing else changes, 2019 will be as follows :
$13k property tax
$10k state income tax
$11k mortgage interest
probably <$3k charitable contributions
net result : standard deduction of $24k
plus $0 personal exemptions

Ie. $22k extra taxable income vs tax year 2016, and $24k more taxable income than tax year 2017


As time goes on, the property taxes go up, but their deductibility is already limited to $10K.
And as the mortgage interest gets paid down, it gets less and less likely that I would be able to itemize.

Borrowing against HELOC wouldn't help since interest is no longer deductible.

[OT comment removed by admin LadyGeek]
I guess the big difference is since AMT wasn't an issue for you the loss of state tax deductibility hits you hard. I've been dealing with AMT for years, preventing me to be able to take the deduction. As a result I'm not losing a deduction that I didn't have.

kevinpet
Posts: 40
Joined: Fri Jan 13, 2012 1:27 pm
Location: CA
Contact:

Re: Tax reform SALT affecting in Bay Area?

Post by kevinpet » Thu Mar 01, 2018 4:14 pm

BusterMcTaco wrote:
Mon Feb 26, 2018 1:42 am
visualguy wrote:
Mon Feb 26, 2018 1:19 am
People with large SALT were typically hit by AMT, so the impact of the SALT deduction changes isn't really as significant and widespread as one would think.
...
Anyway, in my case (high income, high property taxes), the new law would have actually kicked me out of AMT by increasing my standard taxes, and I would have owed another $3,613. Of course, I'm saved by the new and improved tax rates (and the Section 199A deduction).
I'm pretty sure that's exactly what visualguy was getting at. Elimination of SALT deduction raises taxes on people who tended to be hit by AMT. You only experienced about 40% of the theoretical impact of the new tax law.

madbrain
Posts: 4929
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Thu Mar 01, 2018 6:01 pm

hale2 wrote:
Thu Mar 01, 2018 3:23 pm
I guess the big difference is since AMT wasn't an issue for you the loss of state tax deductibility hits you hard. I've been dealing with AMT for years, preventing me to be able to take the deduction. As a result I'm not losing a deduction that I didn't have.
Yes. I guess I'm technically upper middle class as I owned AMT only once. And the tax reform is hitting me.

Just finished my 2017 taxes as Turbotax finally added forms 8936 (EV tax credit) and 8911 (EV station tax credit) today. Turns out the 8911 credit for my EV station is zero'ed because my tax is lower than AMT tentative amount on form 6251, even though my AMT is $0. So it is still affecting me in some way. I guess I should have bought the EV and the EV station in different years - silly me ! Anyway, I wasn't even aware of the EV station credit last year - that credit had expired, and was only recently retroactively for the 2017 tax year last month.

DH0
Posts: 8
Joined: Thu Jan 11, 2018 3:00 pm

Re: Tax reform SALT affecting in Bay Area?

Post by DH0 » Thu Mar 01, 2018 6:42 pm

Our federal taxes will be about $10k lower in 2018 than 2017. In 2017 we are being hit hard by AMT.

MFJ, 2 kids, $1M mortgage (all interest deductible, purchased a few years ago), mid six figure AGI.

hale2
Posts: 150
Joined: Sat Feb 15, 2014 5:54 pm

Re: Tax reform SALT affecting in Bay Area?

Post by hale2 » Thu Mar 01, 2018 7:26 pm

madbrain wrote:
Thu Mar 01, 2018 6:01 pm
hale2 wrote:
Thu Mar 01, 2018 3:23 pm
I guess the big difference is since AMT wasn't an issue for you the loss of state tax deductibility hits you hard. I've been dealing with AMT for years, preventing me to be able to take the deduction. As a result I'm not losing a deduction that I didn't have.
Yes. I guess I'm technically upper middle class as I owned AMT only once. And the tax reform is hitting me.

Just finished my 2017 taxes as Turbotax finally added forms 8936 (EV tax credit) and 8911 (EV station tax credit) today. Turns out the 8911 credit for my EV station is zero'ed because my tax is lower than AMT tentative amount on form 6251, even though my AMT is $0. So it is still affecting me in some way. I guess I should have bought the EV and the EV station in different years - silly me ! Anyway, I wasn't even aware of the EV station credit last year - that credit had expired, and was only recently retroactively for the 2017 tax year last month.
You said your husband just started a new job. I wouldn't be surprised if your combined income would have placed you into AMT pre tax reform. You might actually have a lower tax bill under the new tax plan since you are dual income, especially since the marriage penalty was eliminated for most tax brackets.

madbrain
Posts: 4929
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: Tax reform SALT affecting in Bay Area?

Post by madbrain » Thu Mar 01, 2018 8:55 pm

hale2 wrote:
Thu Mar 01, 2018 7:26 pm
You said your husband just started a new job. I wouldn't be surprised if your combined income would have placed you into AMT pre tax reform. You might actually have a lower tax bill under the new tax plan since you are dual income, especially since the marriage penalty was eliminated for most tax brackets.
Yes, he did. It just remains to be seen if he will end up staying there. It's possible indeed if he had ever worked full time for a whole year that it would have pushed us into AMT, but it just did not happen in the last 4 years since we have been legally married. He worked full years earlier, but we couldn't be legally married then, so we got penalized on federal taxes big time vs being married, as we had very different incomes.

As far as marriage penalty, we didn't have one as we were single earner couple the vast majority of the time . When he worked in the last 4 years, it was part time and minimal income.

The $10K SALT deduction limit is actually a form of marriage penalty for two-earner couples, as it is the same for both individuals and couples filing jointly. And if you file married separately, you only get $5K SALT. If both spouses have similar income, it's conceivably getting divorced would yield lower taxes. I haven't done the math on that to find out, as I don't see it happening for us.

See :
http://buffalonews.com/2017/12/16/gop-t ... -families/

likashing
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Re: Tax reform SALT affecting in Bay Area?

Post by likashing » Thu Mar 08, 2018 6:45 pm

https://www.mercurynews.com/2018/03/07/ ... l-tax-law/
Levine expects the impact to be similar to raising mortgage interest rates about three quarters of a percent.
With the current rate of ~4.5% for a $700k 30-year fixed mortgage, and another ~0.75% due to losing some mortgage interest destructibility, 5%+ mortgage is back for this demographic.

Some of them won't know until they file their taxes in 2018 though, when they find out they aren't getting much refund back on the mortgage interest they paid.

schrute
Posts: 186
Joined: Wed Nov 05, 2014 2:27 pm

Re: Tax reform SALT affecting in Bay Area?

Post by schrute » Sat Mar 10, 2018 3:17 am

How much does SALT affect if my only income is from dividends or long term capital gains? I don't thin SALT applies much to long term capital gains or dividends? Just to regular income?

pshonore
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Joined: Sun Jun 28, 2009 2:21 pm

Re: Tax reform SALT affecting in Bay Area?

Post by pshonore » Sat Mar 10, 2018 9:58 am

schrute wrote:
Sat Mar 10, 2018 3:17 am
How much does SALT affect if my only income is from dividends or long term capital gains? I don't thin SALT applies much to long term capital gains or dividends? Just to regular income?
SALT is an itemized deduction just like mortgage interest and charitable contributions. The sum of these reduce AGI regardless of what that AGI consists of (wages, interest, dividends, CGs etc.) and results in less taxable income

mega317
Posts: 2198
Joined: Tue Apr 19, 2016 10:55 am

Re: Tax reform SALT affecting in Bay Area?

Post by mega317 » Sat Mar 10, 2018 11:52 am

Deductions reduce taxable income, but not AGI.

schrute
Posts: 186
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Re: Tax reform SALT affecting in Bay Area?

Post by schrute » Sat Mar 10, 2018 2:00 pm

pshonore wrote:
Sat Mar 10, 2018 9:58 am
schrute wrote:
Sat Mar 10, 2018 3:17 am
How much does SALT affect if my only income is from dividends or long term capital gains? I don't thin SALT applies much to long term capital gains or dividends? Just to regular income?
SALT is an itemized deduction just like mortgage interest and charitable contributions. The sum of these reduce AGI regardless of what that AGI consists of (wages, interest, dividends, CGs etc.) and results in less taxable income
Let's say I had income that was only dividends (I don't by the way, but who knows one day), my tax rate is fixed at 15% for LTCG.. reducing my income may not actually help at all... unless it takes me down to 0%

libralibra
Posts: 166
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Re: Tax reform SALT affecting in Bay Area?

Post by libralibra » Sat Mar 10, 2018 4:39 pm

madbrain wrote:
Tue Feb 27, 2018 1:47 am
Simply not true. I have only ever paid AMT once in 22 years due to a generous severance package - and got it all refunded the next year.

The combination of the $10K SALT deduction limit and removal of personal exemptions will cost me $5000 extra in taxes this year, corresponding to a 25% increase in our federal taxes.

We had $38k of itemized deductions that will turn to $24k standard deduction. And loss of $8k in personal exemptions. That's $22k in extra taxable income. Absolutely nothing in tax reform makes up for this since we have no children, so no child tax credit.
I typed in your numbers to taxplancalculator.com with the deductions 13k prop/10k state/15k other and it predicts $27,232 vs $28,179, i.e. you lose $946. Tried a few things, but couldn't get it to show a 20k vs 25k result, so wondering if your estimate is off.

For me, the calculator is predicting about 3k worse, however I always pay at least 5k AMT, so still a net win for me. (Surprised you didn't hit AMT, at least when single, since high wage+high state tax seems to trigger it.)

PS. Just to get back on thread, a friend told me a house in his neighborhood listed at 1.9m sold for 2.4m last month, so I guess not seeing any effects yet

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