I don’t usually think about my taxes until the forms start to arrive in the mail, around February of each year. But I dug out my 2016 tax return recently to see how I’d fare if the new tax plan released by House Republicans — and endorsed by President Donald Trump — were to suddenly go into effect.
My tax bill would drop considerably under the GOP tax plan, it turns out. I live in one of the high-tax states — New York — that would supposedly suffer if there were a new cap on the state-and-local tax deduction, as the House plan proposes. That measure would sharply lower the itemized deductions I can claim, which means my taxable income would go up. But I’d end up better off anyway, thanks to other changes in the GOP plan. And my taxes would be simpler because I wouldn’t have to tangle with the alternative minimum tax, which the House plan would kill outright.
President Donald Trump speaks during a meeting on tax policy with Republican lawmakers in the Cabinet Room of the White House in Washington, with House Speaker Paul Ryan of Wis., and Chairman of the House Ways and Means Committee Rep. Kevin Brady, R-Texas, right. (AP Photo/Evan Vucci)
I’m not a representative taxpayer. As a mid-career professional living in New York, my income is higher than the national median. I use an accountant, since I sometimes have freelance income that triggers provisions of the tax code I know nothing about. Since I own a home and pay a mortgage, I itemize deductions, like 44 million other Americans, instead of claiming the smaller standard deduction. All told, itemized deductions reduced my taxable income by 24% in 2016.
The House plan would lower the threshold for mortgage interest deductibility from a $1 million mortgage to a $500,000 one, exempting loans that already exist. But my mortgage is below that lower threshold, so that change wouldn’t affect me. The new plan would also put a cap of $10,000 on the amount of state and local taxes I could deduct. That would affect me, since I deduct much more than that (thanks largely to New York’s high taxes). Overall, the $10,000 cap would sharply limit the total amount of itemized deductions I’d be able to claim.
I claimed two personal exemptions in 2016, one for myself and one for a child. That lowered my taxable income in 2016 by $4,050 x 2, or $8,100. The House plan would eliminate personal exemptions, so that break would disappear for me.
The House plan would also double the standard deduction for most filers. For some taxpayers who currently itemize, that would make it a better option to simply claim the standard deduction. But not for me. I’d still lower my taxable income more by itemizing.
With fewer itemized deductions, my taxable income would go up — by about 16%. If the current tax brackets remained in place, I’d have to pay more in taxes. But my tax bill under the GOP plan would actually be lower, for two reasons. First, I’d end up in a slightly lower marginal tax bracket. And second, I’d save big through the elimination of the alternative minimum tax, or the AMT.
What happens without the alternative minimum tax
About 5 million filers pay the AMT, which Congress put into place in 1979. The original idea was to set up a parallel tax structure for high-income filers who use deductions and loopholes to sharply reduce their tax bill — or even cut it to 0 — under the ordinary tax code. The AMT pushed up Trump’s tax bill by $31 million in 2005, the one year this century for which his tax return is public.
While originally targeted at the rich, however, the AMT has morphed over time into a complicated add-on tax that mainly affects “families with children who live in high-tax states,” according to the Tax Policy Center. That’s me, I guess. The complexities of the AMT are one reason I pay an accountant to do my taxes, so that I pay the least amount of tax while making sure I don’t break any rules the IRS could penalize me for.
The AMT added a kind of surtax to my overall tax bill in 2016. Under the House plan, there would be no AMT. Put it all together, and I’d have fewer itemized deductions to claim, but no AMT surtax. My net tax bill would drop by about 11% under the House plan — more than $5,000 in tax savings per year. If that windfall materialized, I’d probably try to save most of it, rather than spend it.
Not every taxpayer would be so lucky. The Tax Policy Center estimates that the House bill would lower taxes taxes for the average filer by $1,100 per year in 2018. But taxes would actually go up for about 12% of filers in 2018, and 28% in 2027, according to the Tax Policy Center. Families with a lot of kids might be one group that pays more, since they’d no longer be able to slash their taxable income by claiming a personal exemption for each child. Filers who currently claim upward of $30,000 in state and local deductions could lose more through the cap on that break than they gain through lower rates. And recent analysis by Congress’s Joint Committee on Taxation shows average effective tax rates could rise slightly for a few lower-income groups, over time.
The tax bill would also add around $1.5 trillion to the national debt over a decade, partly because of big cuts in business taxes. Supporters say those tax cuts would boost economic growth and generate more federal revenue, over time. But that generally hasn’t happened in the past, which means tax cuts could weaken the economy by pushing up annual deficits, raising interest rates and perhaps causing a recession at some point. So tax savings today might best be put in a rainy-day fund.
