I firmly believe tax policy changes behavior. The higher your taxes go, the BETTER your life becomes! Why? Because at the margin, the less money you keep, the less motivated you'll be to work. Since the love of money is the root of all evil, the less time you spend chasing money, the happier you will be.
One of my catalysts for leaving work in 2012 was because the finance industry was in a structural decline. We were working longer hours for less pay. At the same time, we faced a progressive tax system where we had to pay a 39.6% Federal tax rate plus a 3.8% Net Investment Income tax plus a 0.9% Medicare tax plus an Alternative Minimum tax plus a 13% State tax plus Social Security tax plus Sales tax plus retroactive State taxes to pay for government overspending. Instead of complaining about paying a 60%+ marginal tax rate, I just negotiated a severance to make no money as a writer.
My life since leaving work has never been better, all because I decided to focus on maximizing freedom instead of maximizing net worth. When you're in the grind, it's hard to fathom the benefits of giving up a steady paycheck. But the benefits truly are incredible.
For those of you who naturally like to work more when you can keep more of your money, here are three items from the new tax plan that will ruin your life or your family if you are not careful.
Surprise Items In The Tax Plan That May Ruin Your Life
1) Your 529 plan can now be used for private secondary education. Before, you could only use the proceeds of your 529 plan for tuition at an accredited four-year university. Under the new tax plan, you can now use $10,000 a year towards private grade school tuition.
I'm one of many parents who is still undecided about the wisdom of spending a fortune on private school instead of just having my son go the public school route. With the internet making education and meet-ups free, the value of a private school education has declined. Therefore, it makes little sense to spend record high levels on tuition just because you can afford to.
Once you start spending $10,000 – $60,000 a year on private grade school education, expectations for your kids go way up. When your expectations go way up, a pressure cooker environment may develop that suffocates the joy out of everyone. If your kid is especially sensitive to the plight of others, by going to such an expensive institution, he or she may feel tremendous guilt or pressure to perform. As a consequence, they might logically choose to work in a soul-sucking industry that's focused on making as much money as possible to pay you back or provide the highest ROI, instead of choosing an industry that's focused on helping those most in need.
The new usage rules for the 529 plan may tip the scale in favor of sending your child to a private grade school. It's one of those 20% off coupons that can end up costing you a fortune. What the new tax plan should have done was provide a deduction if you send your child to public school instead. The more parents focus on the public school system, the stronger it will become given there will be more involvement and more funding.
Doesn't having your child learn the same material at public school, while saving $300,000 – $500,000 in private grade school fees and avoiding the stress of high expectations, sound wonderful? Not if the new 529 plan rules can help it.
Related: What If You Go To Harvard And End Up A Nobody
2) Miserable high income earners in expensive cities become even more miserable. I know I've done a poor job of highlighting the plight of HENRYs (high earners, not rich yet) living in expensive cities like San Francisco or New York, but that doesn't change the fact that so many of these well-educated, 50+ hour a week, highly taxed, stressed out of their mind individuals are miserable. They see no end in sight to their grind because they don't build passive income and don't work on a side business to give them an eventual escape outlet.
By capping state income and propery tax deductions at $10,000, residents living in high state tax and high property price cities are getting an uppercut to the chin. The annual property tax bill for a $1.5M median priced home in San Francisco is ~$19,300 a year. Add on $16,000 a year in average state and local income taxes paid, and you're at $35,300. Your tax bill could easily be $5,000 more as a result.
Meanwhile the capping of mortgage interest deduction on a new mortgage amount of $750,000 means about $10,000 less in mortgage interest deductions in the first year of amortization. You can now add on another $2,000 to your tax bill.
One of the reasons why I sold my rental house, which I'd owned since 2005, is because of its onerous $23,000 annual property tax liability. Yes, it can still be deducted as an expense for landlords, but the new deduction limit for new homes will have a negative knock on effect on property values. I anticipated some type of detrimental tax law to pass given San Francisco is a sanctuary city in a blue state. But I just expected some type of reduction in the mortgage interest tax deductibility. To add the $10,000 SALT cap is a huge negative surprise. Further, the $10,000 cap is for married couples, while two singles get $10,000 each.
This new tax law may be the tipping point that causes a consistent net migration out of expensive coastal cities and into no state tax states or states that have a much lower cost of living. Coastal cities have turned into one big grind. Traffic is horrendous. Home prices are unaffordable. The cities are turning economically homogeneous. Even moving to the western part of San Francisco has not allowed me to escape the tentacles of the tech industry. My only next step is to move to Hawaii and deploying my BURL real estate strategy of investing in the heartland.
Related: Scraping By On $500,000 A Year
3) Estate tax threshold rises to $11 million for individuals and $22 million for couples. The easiest lifetime net worth target to shoot for is the estate tax threshold because nobody in their right mind would keep anymore due to the 40% death tax. When it was $5.49M per individual, it provided a high enough goal for most people to shoot for without feeling too discouraged that it was an impossible dream. While most people never accumulate $5.49M, they do get to a level where they can comfortably leave all their assets to their heirs tax free.
Now imagine you are one of those people who believes they'll reach that $5.49M threshold before the age of 100 thanks to inflation, investment returns, diligent savings, and good financial planning. You are on cruise control gliding towards your goal of leaving a significant tax free estate to your heirs. Now, suddenly, you've been incentivized to figure out a way to work longer, harder, and take more investment risk to save $2.2 million in estate taxes ($5.51M X 40%) and get to the $11M target.
Of course any reasonably motivated person can't help but gravitate towards killing themselves for more money. Further, there's a good chance the estate tax threshold might change again in the future, thereby wasting all your time trying to get to a $11M net worth!
What many of you will now logically do is input some figures in a compound interest calculator and see what it will take to get to $11 million. Below is a realistic assumption I've provided where your $100,000 grows to $11,467,826 in 50 years if you earn a 6.5% annual rate of return and save $25,000 a year. Time to get to work, forever!
Related: Net Worth Targets By Age, Income Or Work Experience
BONUS: The higher AMT threshold makes you no longer satisfied with making top 5% money. $200,000 is the ideal amount for maximum happiness for an individual because it's not subject to as many deduction phaseouts and the AMT. In 2015, more than 10.3 million households had to calculate their AMT liability. The effective tax rate on $200,000 is also reasonable at ~20%.
Now that the income phaseout threshold for the AMT has risen from $120,700 / $160,900 for singles / couples to $500,000 / $1,000,000 until December 31, 2025, it's only natural to try and make up to these limits. And generally, to make $500,000 / $1,000,000, you'll either have to move to a big, expensive, congested city or work 80+ hours a week for at least five years building a business to give yourself a chance.
Related: How Much Do The Top Income Earners Make By Percentage
The Only People Who Won't Be Miserable
The only people who won't be miserable under the new tax plan are those who are already rich. These are the people who are getting the most money back for just existing, even though they need the money the least.
As a result, the tax plan will make millions of regular income earners miserable due to the envy they have for those who already have the most. Even though the tax plan provides tax savings to the middle class and lower middle class, it doesn't feel right when some others get so much more.
I feel sorry for those people who decide they are now going to ruin their lives to earn more money they don't need due to lower taxes. I wish everybody does start earning $500K per year and accumulates $11M per person in assets just to see that money doesn't improve happiness. Once you earn enough money to comfortably provide for your family (~$100K a year in non-coastal cities, ~$250K a year in coastal cities), happiness is dictated more by health, family, and friends.
Beware of the endless grind.
Related:
Do You Want To Be Rich Or Do You Want To Be Free?
How To Win Under The New Tax Plan
Readers, do you forecast your behavior changing under the new tax plan? Are you more motivated than ever to chance money that doesn't do anything for your well-being? What are some other surprises in the new tax plan that may affect behavior? Subscribe to the FS iTunes channel to listen on your mobile device on your way to the grind!
Sam,
Have you looked into Montessori grade school education? My sister is a Montessori teacher and from what she has shown me, I feel it is worth the extra expense at least at the lower levels.
I kind of looked into it but not really. Can you share with me several of the key benefits you think? Thanks
I never understand why high earners aren’t outraged about paying taxes. Why can’t you see that the real problem is that taxes are just too high. Why do you have to spend your valuable time trying to find a way to pay less taxes every time there is a new tax law. If you’re taxed 50% then you gave half you’re working life to the government!!. How is it our fault that someone had 7 kids and they expect us to foot the bill because we actually worked. I never understood why high earners are so afraid of supporting someone who will say taxes are wayyyyy too high. This system will turn us into slaves one day, if all you do is follow laws.
I enjoyed this article and found your criticisms of the 529 plan changes and overall assessment of the new tax plan to be both fair and interesting. While I don’t think the lowering of marginal tax rates or increasing the estate tax threshold will have any noticeable impact on my behavior or desire to earn a higher income, that may very well be true for some people despite my hope that it isn’t.
“Traffic is horrendous. Home prices are unaffordable. The cities are turning economically homogeneous.”
That’s the direction Hawaii is heading as well (though not to the extreme of bay area…yet). The grass isn’t always greener.
You’re absolutely right. Traffic is already bad in Honolulu during rush hour. But never planned to drive during rush hour, and the longest distance I need to drive will usually be 3 miles from where I wanna live vs 20 miles in the Bay Area.
Kaimuki to Kahala never has traffic!
Everything is relative!
I’m surprised you didn’t mention the pass-thru deduction. There’s a lot of confusion around this but I spent a few hours on Xmas eve figuring it all out! Turned out it was a good Xmas present to myself :)
In short, every single person who owns a business will be able to take a 20% deduction on their net profit from their business as long as their total taxable income (ie biz net profit +w2 income +spouse income – std deduction -401k contrib, etc) is below the $157,500 (single)/$315,000 (married) thresholds. So that’s going to be almost everyone..
If you make more than the limits, then the type of business matters (ie service businesses are excluded). And if you are in a non-excluded business, then you have to take the lower of 1/2 of all your W2 wages paid OR the 20% deduction of your qualified business income (QBI).
I expect lots more loopholes to come out of this part of the tax code as it was so hastily put together, there’s no way they made it perfect.
Ah, that’s because having a business with pass through income is a GOOD thing. This article focuses on how the new tax plan might ruin your life.
So how do you think 20% deduction works? $300,000 income means a $60,000 deduction so taxable income is $240,000?
That depends :-). It’s based on taxable income and of course the above referenced earnings thresholds. I haven’t seen anything that looks like an actual tax form to see if any items are excluded from the taxable income calculation- like losses or say large solo k deductions that many self employeds have.
I’ve only read anecdotal stuff
I just can not wait to see what the joykillers at the Franchise Tax Board come up with. They have 8 addresses to mail a payment to so imagine what they can do with a huge change in the code.
There is talk about making your
property tax/income tax a charitable contribution to the state and then that would be deductible. What do others think……
I’m seeing more and more new shopping centers in the burbs and big fortune 500 companies moving away from coastal cities. So it’s possible to have your cake and eat too; that is live in a lower cost of living area with a high paying job and not fall victim to the property tax limitation it seems.
One of the interesting aspects of this tax reform bill is the impact it can have on state income taxes. I took my 2016 return and ran a hypothetical comparison of how my 2016 income would be taxed under the new plan. My wife and I live in Oregon, with a 9% marginal state income tax rate. In 2016, after all deductions, we had a taxable income of $152k and a fed tax bill of $29.5k. Under the new plan, with the reduction of SALT exemptions, my taxable income increases to $175.4k, but with the lower tax rates and the income expansion of the child tax credit (we have one child), my federal tax bill slightly decreases by about $900. When I calculate the impact on my state income taxes, all the savings get wiped out. Oregon uses the Fed taxable income as a starting point, then makes a few adjustments from there. But because my fed taxable income is higher, I would end up paying a little more than $1k more in state income taxes. Overall, I am basically a wash under the new plan, paying slightly more overall, but there is a net transfer of my tax bill from the fed to the state.
I too live in Oregon (have my entire life), am a “HENRY”, but am totally screwed by the new plan and the great state of Oregon. I will be paying 5 digits more either way. I have run my scenario on two different calculators:
1. http://www.Taxplancalcuator.com: =$19,500 more
2. http://tpc-tax-calculator.urban.org/: =$23,750 more
As I see it my options are:
1. Move to Vancouver, WA (I work for an out of state company and travel so technically I could do this, BUT I’m an Oregonian and I don’t want to live in the “couv…)
2. Buy a sham primary residence and “act” like I moved to Vancouver, change gyms, license plates, buy a burner-phone and sleep with one eye open that Oregon doesn’t catch me
3. Stop being a “HENRY”
4. Convince my company to hire me as a 1099’er, pay the tax attorneys downtown a bucket of money to set me up as consulting company and create a ton of paperwork for others and myself. And probably still sleep with one eye open.
5. Shrug my shoulders and cycle through the stages of grief until I get to acceptance
#3. Stop being a HENRY. After leaving my income behind in 2012, life got so much better. Less taxes, less stress, lower expectations, and more freedom.
You should do a detailed analysis (plugging in numbers into a calculator) of your 2018 tax liability before and after this tax reform plan is put through. Based on various simulations I have done I find it hard to believe anyone is going to lose 19K-23K under this plan. The sites you live above often does not take into account of the fact that under the old law a taxpayer will also have to pay AMT whereas under the new law they are unlikely to get ensnared.
The only scenarios where I found a taxpayer will end up losing the sort of amount you are talking about is someone who is single or even worse a single parent in a ultra high tax area with AGI of around 750K as well as having high real estate taxes and a very large mortgage. And even if I put such a person in OR, I found such a single tax payer would lose around 15K and not 19K-23K.
I am not saying you are not in such a situation but just that those sites might be off and the damage will be bad but perhaps not as bad as these sites indicates.
The amazing thing is, nobody really knows until they do their 2018 taxes in 2019. But it sure seems like many people living in coastal cities, which consist of half the US population will pay more.
But, nobody who is negatively affected will be a dummy and stand idle and not make some changes. I know I will! Like pay my prop tax due April 2018 by 2017.
If we have been subject to the AMT the last few years, and expect the same for 2017, does prepaying the April Property Tax bill even help?
I plan to prepay before April 2018. It doesn’t hurt if you have the cash. Even if it doesn’t help, all you did was lose the interest income on 3 1/2 months worth of property tax payment. And since interest rates or nothing, there’s really nothing to lose.
I would not bother if that is the case. AMT means that extra property tax deduction in 2017 would not lower your 2017 income tax.
Hi,
Appreciate the analysis, great thoughts. I think that the tax bill is interesting as it’s literally a half glass full/empty scenario. Some of it is truly needed reform (e.g. removal of certain deductions, changes to the corporate tax structure), but others like the pass through changes from what I understand are just going to lead to Kansas style problems. One’s impressions of it seem to come to one’s party registration mostly (which is a sad reflection of our polarized state unfortunately). For me personally, the most exciting changes are the 529 expansions and the removal of SALT/high deduction (ironically). As a parent, one aspect of the 529 I hated was the inflexibility, as it makes planning harder. For instance, let’s say one had 2 kids, and you save for both of them in a 529. If the eldest unexpectedly had much lower college expenses (as they get a scholarship, are fiscally careful or the future cost of college doesn’t inflate as much as expected), and the younger one was still in K-12, you couldn’t use those “extra” funds to help the younger one go to a better school or keep current costs lower. Now if we have extra in the 529 as things progress, can decide to use for a superior K-12 education. Separately, we’re looking into moving up the housing chain. The reduction of SALT and any mortgage deductions for >750k mortgages is going to kneecap to a degree the higher end pricing. At least that’s my hope. I know so many young “HENRYs” that feel priced out of the upper middle class house market, and I think that those removals will allow them to argue for a significant reduction of a house’s selling price. If you were to go buy a 1M home in MA/NJ/NY now, you have so much more leverage on price, as a lot of the deductions were factored into that original price. The reduced benefits will also finally increase pressure on state governments to control spending, particularly related to pensions, so this may lead to lower state taxes down the road ironically. At least those are my thoughts/hopes right now, time will tell :)
Great thoughts, and definitely the glass half full view point. Having more flexibility is good in the 529 plan. I just fear for those people who can’t truly in comfortably afford private school tuition, that it pushes them over the edge to seek something that may not be very beneficial long term. Private school is really about starting the grind very, very early.
I just had dinner with someone whose sister went to private school all her life and went to Stanford. After Stanford she decided to take a year off. And when she returned, she decided to just hang around and live with her parents for two years. She was burned out, and everybody truly knows that her entire grade school and college education was a sub optimal use of time and money.
I think about people at the margin. Because it is there who will be affected the most. I don’t care about the rich, who can afford everything easily. I care about the people who were so desperately aspiring to be rich and to get prestige and status. It really is not worth it.
Let’s see if property prices in expensive cities truly do decline!
I played around with different simulations to construct what type of realistic taxpayer gains the most and loses the most under this plan (as a function of AGI.)
The household that gains the most is a ~400K married household with a large number of children (I made it 4 to be realistic) that rents in a low tax state. This household gains 6.3% of AGI under this plan. To make it more realistic if this household owned a house then the gain is around 5.3% of AGI.
The household that loses the most is a ~750K head of household (single parent) living in SF that owns a house. This household loses 3.4% of AGI. If the same person was single the loss would be around 2.9% of AGI.
Like I said before, this tax plan is a tax cut for lower and middle income taxpayers and for higher taxpayers it is shift of wealth from people depicted in “Sex in the City’ to “Leave it to Beaver.”
The reality is that this tax bill will most likely only survive a few years. I reserve the right to be wrong! There are mandatory cuts built in and they will have to be employed unless we can get to a 4+GDP. The second SS and Medicare are threatened with even a minor cut, the party in power will suffer. They won’t actually cut of course but just the mention of it is a political nightmare.
In the end, I don’t know how this will turn out. I know it is good for my household but we are not the average American. Again, because it passed the way it did, the bill won’t last in all likelihood. Same applies to Obamacare and how that passed. Basically the tax bill killed it by getting rid of mandatory coverage. In 19, insurers will be able to offer customized plans that don’t adhere to the ACA.
https://nypost.com/2017/12/22/cuomo-signs-order-to-help-new-york-property-owners-with-new-tax-bill/
Cuomo signs order to help New York property owners with new tax bill
Saw it. But it’s so temporary for just one year. It’ll be interesting to see if Los Angeles and San Francisco and other cities do the same.
Only several days left to buy a property to get the full 1 million mortgage interest deduction grandfathered in! That would be silly if someone let the tail wag the dog.
Cheer up guys. The personal tax changes are all temporary. In 10 years you can all go back to your happy life. It was really about a corporate tax cut to stimulate the economy like the Northern European countries (with the happiest people) have already done. And getting $11t of cash returned to the US by multinational corporations. Maybe they will just repurchase their stock and not tempt folks to work by creating new jobs. Its all good.
Hi Sam!
I’m a 21 year old college student and I have a question for you. I have stocks with long term capital gains and I’m only making $30,000/year in CA. Can I sell the stocks and pay 0% capital gains and rebuy them to avoid paying capital gains later? They are S&P500 mutual fund stocks.
Hi TJ,
Not 100 percent sure about your individual taxes but in general if you sell a stock or mutual fund and want to be taxed with the lower long term capital gains rate you must wait 31 days before you buy them back, otherwise it turns into a short term capital gain. 15 percent versus 20 percent tax. I’m pretty sure your going to pay capital gains regardless of your income.
Welcome to the world of taxes!
I don’t know why you do this. But look up the wash rule.
The reason why you plan to do this trade is more important than the taxes.
TJ,
I moved out of CA, but when I lived there, CA taxed capital gains as regular income. In my tax bracket, the Feds only taxed cap gains at 15%.
So even if your income is low enough to pay 0% federal income tax, you might have to pay state income tax…
Oops!
I meant to say: So even if your income is low enough to pay 0% federal CAPITAL GAINS tax, you might have to pay state income tax on your CAPITAL GAINS.
I think that I will benefit from the new tax plan. I take the standard deduction which will increase, and 30% of my income is from my rentals which will get a 20% haircut if I understand correctly. Also a small decrease in the rate that I will pay. I think I’ll do better, really surprised.
Sad. This post is shite, Sam. I’ve always come on to your site to learn, not to read your political opinions.
Right off the bat… you say “The higher your taxes go, the BETTER your life becomes!” and then follow that up with “One of my catalysts for leaving work… We were working longer hours for less pay. At the same time, we faced a progressive tax system…” Those are so beyond contradictory, you can see the clear bias right from the beginning. You have hard working Americans who SHOULD see bigger paychecks from this legislation, but you multi-millionaires on the coasts bitch because your property tax deductions are being taken away.
Do you simply forget what it’s like to have to wake up and work 50+ hours a week just to make ends meet?
Merry Christmas.
Thanks Kevin! Not sure how you can’t understand the logic that higher taxes = better life and leaving work because of higher taxes = better life because not having to grind away at work is better than having to. Did you not read the subsequent paragraphs that explicitly says life has never been better not chasing money?
But I’ll accept your shite intelligence if you can keep on reading and sharing. I’ve been working about 80 hours a week this year taking care of my son full time and writing posts for you to spit on btw.
Merry Christmas!
Hilarious! Funny how Kevin is so blinded by politics he literally lost his cognitive abilities.
There is no mention of Trump or politicos anywhere in this post.
Lowest common denominator Sam! Amazing how Kevin completely misses the point of minimizing the grind.
I’ve seen it 1000 times. We see what we want to see. It’s just the way human nature is. I welcome disagreements with well written arguments. But insults not so much.
Sam-
Is a matter of trust. I trust the Feds to keep our country secure and to give us a decent infrastructure, plus holding our founding father’s principles (freedom of speech, freedom of religion, etcetera). I do NOT trust them with excess money. I trust myself to make sound decisions about me and my family with any extra money.
I do respect you have the guts to express your points of view beyond a purely financial aspect. Same for Joe (Retired by 40); I used to work for his previous employer for a loooong time.
I understand why Sam has mentioned he wants to dumb things down in the future. Getting attacked by dumb readers who do not comprehend his posts must be so frustrating, especially since he spends so much time writing. There’s a great line in a movie goes like this, “are you stupid or something boy?“
Maybe intelligence really is needed to get ahead in life. I enjoy the multilayered meanings for what it’s worth.
Kevin, that comment about those of us getting hammered by the new tax plan not knowing what it means to work 50hrs a week is off base.
Nobody likes to take a hit by something they have zero control over (the tax code, for example) especially when they work really, really hard. Nobody.
Look, I took 113 flights for work last year and worked 60-80 hours every single week to make the money I made. I put my kids on the bus to school 3 days a week and ran through airports to get home in time to put my children to bed. I worked every day before my kids got up and after they went to bed. I mowed my own damn lawn! If you add up federal, FICA, state & property taxes I paid 49% of every dollar I earned this year in taxes. And, yes, I’m pissed off that because of TCJA next year I will now pay >50% of everything I make to the government. I’m pissed and I’m not going to apologize for it. .
Pain is mandatory, Misery is optional. This from someone with Bi-Polar disorder.
The SALT deduction cap should have no impact on a rental property, the taxes for which are deductible as a business expense. Or am I missing something?
Also, plenty of people (I read about 40% of itemizers) already “lose” their SALT deduction through the AMT.
Finally, 96% of the tax increases stemming from the SALT cap will be paid by people earning $150,000 or more per year (and +50% will be paid by the top 1% of earners). The cognitive dissonance of Progressives bellyaching about the SALT cap is both funny and sad.
http://www.taxpolicycenter.org/taxvox/how-changes-salt-will-affect-itemizers
You aren’t missing anything. You have to think one step further, and think about the knock on effects. Prices are affected by demand on the margin. And I expect new demand to go down while supply is going up.
Hi Sam,
Just for a little perspective only 1.5% of homes sold in America will be affected by the new mortgage deduction.
As far as chasing the extra buck. I am DEFINITELY one of the people who will be! For the first time in years I feel business owners are given a golden opportunity to thrive, excel, and create. Yes, I will be putting some of this windfall in my pocket, but I also see it as a great opportunity to enhance my employees lives as well. Many of my friends are small business owners and the sense of optimism we all have is something we have never felt before. We want to pay our employees more, we want to buy new equipment, we want our country to thrive and we now feel we have the opportunity to do something about it.
Merry Christmas to all!!!
Bill
I really want to dislike the tax changes as a bleeding heart libertarian who thinks this is just the first step in making life harder ultimately for the middle class and the working poor since it will raise insurance rates, they’ve already signaled they want to cut Medicare and Social Security and the tax cuts are only temporary except for businesses, but I really can’t help but like it personally.
Economists have been saying for years that the mortgage interest tax deduction is a subsidy for homeowners that doesn’t really help the middle class and our current corporate tax rate isn’t competitive or fair.
For me personally as a software developer, whenever it’s convenient for me, I’ll easily be able to shelter some of my income by incorporating and taking advantage of the lower tax rate and the other changes are pretty much a wash. I don’t live in a high tax state.
Sam,
Do agree that there will be an exodus of rich, FIRE or HENRY crowds from CA, NY, etc to states with no state income taxes. CA state income taxes are already outrageously high even with the state income tax deductions on the federal income tax returns. Taking away the SALT deductions will serve as a tipping point. I for one will leave CA upon retirement.
Check out: https://www.financialsamurai.com/focus-on-investment-trends-why-im-investing-in-the-heartland-of-america/
I completely agree with you and have the exact same plans to leave Oregon for the same reasons. Boarder cities (PORTLAND) from high to low/no tax states will lose high state income tax payers due to the SALT removal. It is a tipping point.
Finja
Had the same thought. It could tip NV to solid blue and AZ to lean blue over the next 4 years or so. That may be happening anyway but what about TX? People I know are surprised to hear this. Trump won by 9%, Romney by 16%. Not sure if you can even count Bush since he is from Texas. The map could be shifting for both parties (more red in rust belt and more blue in SW USA). Interesting to see how it all plays out.
The tax plan is going to be interesting. While it clearly will hurt Californians (which I am), I wouldn’t be surprised to see what you mentioned which is the migration of people to other low SALT states. Surprisingly, from a political standpoint, this would be migrating more liberals and independents from heavy blue states to some borderline red states where they will plant roots. This could skew the political landscape to blue in the long term. While the GOP may have been thinking they were giving the middle finger to blue states, this could really be a plausible outcome.
It’s not just Californians, but people living in high state income tax and high property tax states.
With technology, it’s easy to move now. There’s no reason to stay in a crazy expensive place when you can cut your expenses in half and work remotely or work in a satellite office.
https://www.financialsamurai.com/focus-on-investment-trends-why-im-investing-in-the-heartland-of-america/
There’s been negative net migration for YEARS from high tax states like California and NY, long before this tax bill.
Ask Nevada, Colorado, and Washington about California movers :)
Janitors, teachers and waiters aren’t moving due to the heavy burden of not being able to deduct SALT. High earners generally in the private sector MAY move but I doubt it will be dramatic. I think a good majority would be fiscally conservative. What you describe might happen but I think it’s not likely. Will probably make blue states bluer and red states a deeper red.
In the short run, we are absolute winners. My wife’s business can now be labeled a pass through and she gets the lower bracket. This is only good for certain businesses that make less than 315K a year. She is the expert in this field, not me. I trust her. CPA and MS in Taxation with 25 years experience. We will save about $10K that way and another $5K on the new brackets.
Down the road the unintended benefits could make things worse. That is an unknown.
As for Public versus Private College, I have done a ton of research on this issue since I have a daughter who is a senior in high school and another who is a freshman. The difference between public and private is NOT as steep as the sticker prices suggest. The vast majority of private colleges offer tuition discounting to affluent students in the form of merit scholarships. Almost no one pays the full price. Further the costs for public schools has been increasing more and more. Penn State ( I am in PA) is now 33K a year all in. A couple of out of state schools my daughter is interested in will probably cost between 38-42K after discounting. So, it is not a simple equation.
The type of business only matters if you go over $315k as a married couple! This is going to be a huge deal for anyone with side income/business/etc and yea you’ll save about $4.5k for every $100k in net biz profit!
Why do SALT deductions even exist? I’ve never understood why Federal tax revenues should go up or down based on what States do in their tax plans.
Why should D.C. get less revenue because California/NY/NJ etc. can’t manage their budgets? Not that D.C. does a good job managing it’s budget either, but I’ve never understood why this makes sense.
Probably because half the country lives in the coastal cities. And in order to stay in power, you need to throw some bones to have the voting population.
Everything is Yin Yang in politics as well.
These deductions also might be a way for amending federal income tax rates that do not adjust for the cost of living around the country eg A 25% federal income tax on someone living in New York City is more onerous a 25% federal income tax on someone living in Des Moines.
I’m not quite getting the last part of your statement. It seems like you’re implying that 25% is too high for NY…so why would NY add to their misery by giving them even MORE taxes?
Even with the SALT deduction, you pay more in taxes in NY than you would in Des Moines. If a 25% is too onerous for people in NY, California etc….then how are they better off with high state taxes + SALT, when they end up paying more? Just have lower state taxes to remove the burden……at which point there is no “need” for SALT.
There’s two parts. There’s the federal government part. and then there’s the state part.
The federal government is allowing for a state income tax deduction to help defray the cost in high cost of living areas where they do not adjust federal income tax.
I’m not certain it is always a question of low tax areas being able to better manage their budgets than higher tax areas. Often (not always) higher taxes translate into more services and better quality of life.
In addition, the high SALT states tend also to contribute more to federal taxes than they use, compared with low SALT states.
I think both these reasons justify to a reasonable extent why SALT deductions are reasonable.