GOP tax plan: possible winners and losers

The tax reform plan released Thursday by House Speaker Paul Ryan and his Republican colleagues will have winners and losers in the Santa Clarita Valley.

The Tax Cuts and Jobs Act, which GOP leaders hope to have on President Trump’s desk by Christmas, will lower the corporate tax rate from 35 percent to 20 percent and reduce the number of individual tax brackets.

“The big winners are corporations and some wealthy individuals,” said Jim de Bree, a retired Santa Clarita CPA who specializes in tax policy. “It is not clear how the middle class will fare. The impact on an individual is highly dependent upon their own personal situation.”

De Bree added the caveat that the 428-page bill is written “in the language of the Internal Revenue Code, which isn’t always English. The legislation is in its early stages and the final form could look

considerably different.”

The cut in the corporate rate drew praise from Jay Timmons, president and CEO of the National Association of Manufacturers, who called the bill a “grand slam for hardworking manufacturers and the U.S. economy” in a statement. “The proposal is a guaranteed path to surge investment, jobs and economic growth that will lead to better lives for every American.”

But for several reasons, the bill could be bad news for Santa Clarita taxpayers, especially those looking to buy a house.

“The tax benefits of buying a home essentially go away,” de Bree said.

This is due to two provisions in the bill. The mortgage interest deduction would essentially be cut in half.

Currently, a taxpayer may deduct interest on up to $1 million of mortgages used to buy or build a first or second residence, plus interest on up to $100,000 of a home equity line. Going forward, interest will only be deductible for mortgages of $500,000 or less on a principal residence.

And taxpayers would no longer be able to deduct state and local taxes, and would only be able to deduct property taxes up to $10,000.

Those two changes “will increase the taxes paid by many Santa Clarita residents, de Bree said. “While tax treatment of existing mortgages is unaffected, taxpayers purchasing new homes will likely find few tax benefits to home ownership.”

“From what we have seen so far, limiting the mortgage interest deduction to $500,000 will no doubt hurt homeownership in states with high housing costs such as California,” said California Association of Realtors president Geoff McIntosh in a statement.

“Any change that would make home buying less attractive will be detrimental to the housing industry and the nation’s economy because of the 2.5 million private-sector jobs created by the industry in an average year,” McIntosh said.

Nationally, of the nearly 20 million mortgages originated from 2012 to 2015 nationally, only 5 percent topped the $500,000 threshold, according to the National Low Income Housing Coalition. But California accounted for 45 percent of those high-end homes.

In Los Angeles County, 19 percent of mortgages over the same period were for more than $500,000; the county had more than 105,000 such mortgages, more than any other county in the country.

Californians, with the nation’s highest state income tax but relatively low property taxes, would be among the states hit hardest by the elimination of the state and local tax deduction and cap on property tax deduction.

People who currently claim the standard deduction and have no dependents will probably see a tax cut under the proposal, de Bree said, but its impact on families or single parents with children will depend on their particular circumstances.

Many people who currently itemize their deductions will claim the standard deduction in the future, he predicted. “While this may simplify their tax return, they also are likely to pay more tax.”

Other parts of the plan that could affect local taxpayers:

- Older residents who seek to obtain reverse mortgages will no longer be allowed to deduct the interest on those mortgages;

- The period during which taxpayers can generally exclude the gain from the sale of a principal residence would be extended from once every five years to once every eight years;

- Rules governing alimony payments will change. Now, the payer can deduct alimony payments while the recipient includes them in income. Alimony payments would no longer be deductible or includable. This will effectively increase the after-tax cost of alimony.

The House Ways and Means Committee and the Senate Finance Committee will take up the bill next week, and de Bree said he’d be surprised if they can get a bill done before Congress takes its holiday recess in mid-December, only six weeks away.

One thing he’s confident about is that one group will come out on top regardless of how the bill evolves: “This legislation will be a boon to tax advisors and preparers.”