The Pros and Cons of the Newly Proposed Tax Plan

By: Benjamin Dunbar, Investment Advisor Representative, and Danilo Kawasaki, Vice President and COO

The House GOP released their much-anticipated tax plan on November 2nd. If passed, this plan would be the biggest change in our tax code that we have seen in decades. This tax plan affects every individual and corporation. Some of the most relevant changes include less tax brackets, higher standard deduction, ridding state/local tax deduction, lowering cap on mortgage interest deduction, and capping the property tax deduction. It is difficult to predict who the notable winners will be if this plan gets approved, but the notable losers in this plan are definitely real estate holders with high mortgages living in high tax states such as California and New York.

Below we outline the pros and cons of the proposal, and later explain each part in further detail.

new tax plan pro con

New Tax Brackets

Currently there are 7 Federal Tax brackets ranging from 10% to 39.6%. The new proposal reduces this number to 4 brackets ranging from 12% to 39.6%. The biggest change we see here is previously the 39.6% kicked in at $470,700 for married filling jointly, where now it kicks in at $1 Million. Although many expected the top marginal tax rate to be lowered, it was not. You can see a summary of the tax bracket ranges below.

tax brackets


New Standard Deduction

The standard deduction is an amount that every American gets to deduct from their taxable income in order to reduce their taxes. Currently, the standard deduction is $6,350 for Individuals and $12,700 for married couples. The new proposed standard deduction goes up to $12,000 for individuals and $24,000 for married couples.

Child Care Credits

The current Child Care Credit is at $1,000 per child. This tax credit starts to phase out for married individuals making $75,000 and married couples making $110,000. The new tax plan increases the child tax credit to $1,600, and increases the phaseouts to $115,000 for individuals and $230,000 for married couples. It also gives $300 credit for each person in a filer’s family, including non-dependents such as college students. It is important to note a tax credit is worth more than a tax deduction since a tax credit reduces your tax liability dollar for dollar.

Elimination of the Alternative Minimum Taxes (AMT)

Certain special situations cause people to incur AMT (alternative minimum tax). The new proposal rids AMT. This will be a great tax relief to over 5 million tax filers, who in 2016 paid an average of $7,200 in additional taxes under this AMT provision.

State/Local Taxes

Current tax laws allow you to deduct your state and local taxes. This has big impact in states like California, New Jersey and New York, where state taxes can be over 10%. The new tax proposal no longer allows you to deduct your state and local income taxes, significantly hurting the middle class in those states.

Property Tax Deduction

Currently, 100% of your property taxes in California (roughly 1.25%) of the assessed property value) are deductible on your tax return. The new proposal caps this deduction at $10,000, hurting homeowners of houses purchased at $800K and above. Currently, you are also allowed to deduct property taxes on your vacation home, but under the new plan this deduction will be eliminated altogether.

Mortgage Interest Cap

Currently, homeowners can deduct their mortgage interest on loans up to $1 million. New tax laws lower the cap on mortgage interest to $500,000. Using a 20% down payment rule as an example, this will impact purchases over $625K.

Not Touched

    - No reduction on 401k contributions. Individuals can deduct $18,500 in 2018 ($24,500 for those over age 50).
    - No change in Long Term Capital Gain rates.

It is our viewpoint that the proposed plan will not help the great majority of our clients, who live in California. Eliminating the state income tax deduction, capping property tax deductions at $10K, and capping mortgage interest deduction on loans up to $500K will most likely outweigh the benefits of potentially lower tax brackets, increased standard deductions, and the elimination of the alternative minimum taxes. We also fear this new proposed tax plan will have an adverse impact on the real estate market in California. For a more in-depth discussion of the pros and cons of this new tax plan, please contact your GK advisor before the end of the year.

Are you a self-employed individual or run your own S Corporation? See our next article outlining the affects of the new tax proposal on businesses and corporations.

* This article is not to be construed as a recommendation or tax advice. You should consult your CPA or tax accountant for how these changes will impact your particular situation.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor and separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393.