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https://www.axios.com/republicans-agree-to-raise-bottom-tax-rate-double-standard-deduction-2489774626.html

 

Looks like a proposal may be finally coming out. The interesting thing about this is that those who want to end the mortgage interest deduction, this may allow that to happen since it will effectively make itemizing on an average middle class home unncessary

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I shouldn't be, but I really am a bit surprised that tax cuts are so high on the Republican agenda in this cycle.  This doesn't seem to be a top priority for core Trump supporters and the current economic and budgetary conditions don't really give them a good case for why tax cuts are necessary right now.  It will be interesting to see the details, but you can be sure that the already wealthy will make out like bandits in this deal. 

 

When you look at income growth over the last 50 years it's painfully obvious that we need more tax brackets, not fewer.  Rates should continue to ratchet up as incomes go higher and higher with the top bracket at least at $2 million.  It makes no sense to me that the highest tax bracket starts at only $418k. 

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Republicans are conflating reducing the number of brackets with making taxes less complicated.  The complexity of taxes has nothing to do with the number of brackets. 

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Tax cuts are important to small business. Also, the key is to combine them with a way to repatriate overseas money. Not to be cynical but part of the play is that when you come up with a way to do so, GDP will grow by 10%+ that year. It will eventually come down again after that short blip. But if you do this in an election year, it will needlessly win a lot of votes.

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Almost nobody outside of professional athletes is paid very high incomes because tax rates on capital gains and dividends since Reagan have been lower.  Most fortunes are built on business income and investment income, not personal income, so that's where the tax rates should be higher.  And then of course there are the estate taxes, which are much lower today than they once were.  In England they brought down the 1,000-year aristocracy by ratcheting taxes on the wealthy to nose-bleed levels.  Here we're enabling the formation of one by hardly touching multigenerational wealth. 

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https://www.axios.com/republicans-agree-to-raise-bottom-tax-rate-double-standard-deduction-2489774626.html

 

Looks like a proposal may be finally coming out. The interesting thing about this is that those who want to end the mortgage interest deduction, this may allow that to happen since it will effectively make itemizing on an average middle class home unncessary

 

Essentially pushing eligibility even higher up the income scale just makes the mortgage interest deduction a bigger farce.

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^ I would not call it a farce. It plays a very important role for income producing properties like apartments and commercial properties. Without it, it would still kill the economy and send it into a major recession however, individual homeowners will no longer rely on it for their tax deductions as they do now. What it means is a lot more middle class people will have no vested interest in preserving that deduction, even though it is vitally important to the economy.

 

It is the same reasoning as to why Senators cant kill Obamacare. It has become so ingrained as the way businesses rely on it that to kill it off, you would cause so much disruption, it would take a long time to come back.

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Almost nobody outside of professional athletes is paid very high incomes because tax rates on capital gains and dividends since Reagan have been lower.  Most fortunes are built on business income and investment income, not personal income, so that's where the tax rates should be higher.  And then of course there are the estate taxes, which are much lower today than they once were.  In England they brought down the 1,000-year aristocracy by ratcheting taxes on the wealthy to nose-bleed levels.  Here we're enabling the formation of one by hardly touching multigenerational wealth. 

 

Jake, the one thing you forget to take into account is AMT will capture a good portion of that "investment income" that may not be reported as wages. So it works itself out.

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^^The "mortgage interest deduction" (in this context) only applies to primary and second homes, not investment or commercial properties, which get their own tax treatment.  And some individual homeowners will still benefit from it in this scenario, but only those who earn so much money, own such an expensive house, and have such a big mortgage, that it makes sense to itemize instead of taking the standard deduction. In other words, the people for whom there is literally zero policy justification to provide a lavish tax subsidy to their housing consumption. It's like having a special tax break aimed solely to reduce the costs to upper middle class people of buying organic meat.

 

You might be right that the MID so entrenched that it can't be killed, but that doesn't make it anything like Obamacare, which still has plenty of policy-based defenders. You will literally find almost zero disinterested economist of any prominence, of any political stripe, who support even the current MID. It's ultimate dog of a policy. A random lottery awarding big tax breaks to people makes more policy sense.

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^^The "mortgage interest deduction" (in this context) only applies to primary and second homes, not investment or commercial properties, which get their own tax treatment.  And some individual homeowners will still benefit from it in this scenario, but only those who earn so much money, own such an expensive house, and have such a big mortgage, that it makes sense to itemize instead of taking the standard deduction. In other words, the people for whom there is literally zero policy justification to provide a lavish tax subsidy to their housing consumption. It's like having a special tax break aimed solely to reduce the costs to upper middle class people of buying organic meat.

 

You might be right that the MID so entrenched that it can't be killed, but that doesn't make it anything like Obamacare, which still has plenty of policy-based defenders. You will literally find almost zero disinterested economist of any prominence, of any political stripe, who support even the current MID. It's ultimate dog of a policy. A random lottery awarding big tax breaks to people makes more policy sense.

 

For many Americans, this is the only sizable deduction they get.  Therefore it will be extremely hard to get rid of.

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^^The "mortgage interest deduction" (in this context) only applies to primary and second homes, not investment or commercial properties, which get their own tax treatment.  And some individual homeowners will still benefit from it in this scenario, but only those who earn so much money, own such an expensive house, and have such a big mortgage, that it makes sense to itemize instead of taking the standard deduction. In other words, the people for whom there is literally zero policy justification to provide a lavish tax subsidy to their housing consumption. It's like having a special tax break aimed solely to reduce the costs to upper middle class people of buying organic meat.

 

You might be right that the MID so entrenched that it can't be killed, but that doesn't make it anything like Obamacare, which still has plenty of policy-based defenders. You will literally find almost zero disinterested economist of any prominence, of any political stripe, who support even the current MID. It's ultimate dog of a policy. A random lottery awarding big tax breaks to people makes more policy sense.

 

The MID deduction does not just cover interest for residential properties but mortgage interest for all properties whether they be residential or secured by a commercial mortgage. I know many multi family players who were lobbying to ensure that the interest deduction stayed because it would affect their properties as well.

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^But isn't interest on mortgage debt financing commercial property only deductible against rental income? I don't really see how increasing the standard deduction is relevent to rental expenses, but maybe I'm missing something.  The politically radioactive reform issue has been the Home Mortgage Interest Deduction, which is taken against ordinary income and is only available for primary residences and qualified second homes.

 

^^But under the proposed plan, most of those people will instead take the standard deduction, so won't give a crap anymore about the home mortgage interest deduction. Its benefits already go overwhelmingly to the top decile of earners (higher marginal rates, bigger mortgages), and that will only be more true if you increase the standard deduction. So seriously, when can I start getting tax benefits for buying fancy food?

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I don't get the deduction because I bought a house that I could and do easily afford.  The idiocy of the deduction is that it encourages people to buy bigger primary residences and vacation homes than they should.  In our current low-rate environment it encourages people to put money in the stock market instead of paying down their mortgages more quickly.  Thread after thread on financial advice sites encourage people to "never pay off your mortgage". 

 

Our low capital gains tax rate encourages speculative behavior with stocks and real estate.  Instead buying and holding stocks for dividends or buying and holding rental properties, people day trade and flip homes and unimproved land much more than they would otherwise. 

 

 

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we  don't get the mortgage deduction either because we live within our means.  When my conservative family complains about paying for other people's housing, I think about their huge subsidy from the government for their McMansion.

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we  don't get the mortgage deduction either because we live within our means.  When my conservative family complains about paying for other people's housing, I think about their huge subsidy from the government for their McMansion.

 

Yep. Don't forget the condo down in Hilton Head. 

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^But isn't interest on mortgage debt financing commercial property only deductible against rental income? I don't really see how increasing the standard deduction is relevent to rental expenses, but maybe I'm missing something.  The politically radioactive reform issue has been the Home Mortgage Interest Deduction, which is taken against ordinary income and is only available for primary residences and qualified second homes.

 

^^But under the proposed plan, most of those people will instead take the standard deduction, so won't give a crap anymore about the home mortgage interest deduction. Its benefits already go overwhelmingly to the top decile of earners (higher marginal rates, bigger mortgages), and that will only be more true if you increase the standard deduction. So seriously, when can I start getting tax benefits for buying fancy food?

Yes, you deduct the interest against the revenue on the property. The increase in the standard deduction is not relevant to rental properties. Getting rid of the ability to deduct all mortgage based interest (not just on personal residences, is an idea that has been floated around) would be problematic.

 

Raising the standard deduction, as you correctly point out, removes whatever skin homeowners have in the game for this deduction. Since the majority of people will live in houses and make incomes where they no longer qualify for this deduction there is no incentive for them to fight for it. there will be fewer people who do qualify making it easier for a politician to politically vote it away.

 

 

 

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^^Gotcha. I haven't followed the politics of commercial real restate taxation much, other than seeing speculation that Trump will be more sympathetic than typical politicians for obvious reasons. All my banging on the mortgage interest deduction is specific to the home mortgage version.

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You are making a big assumption that people even understand how their taxes work. 

 

Many people simply do not understand withholding.  Also, people with low incomes and a lot of kids do get a ton "back" every spring.  I work with a guy whose daughter had 5 kids by age 23 and she gets $5,000+ "back" despite an income well under $30k.  But that gift is still significantly smaller than the deduction many people get from ostentatious homes or highly leveraged real estate portfolios. 

 

 

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People have no concept of how it works.  They pay HR Block to do it for them.

 

Who also, by most accounts, have not much more concept of how it works.    You get what you pay for with a temporary tax accountant sitting in a cubicle in a low-rent strip mall....

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If people in that situation took all the exemptions available to them there wouldn't be nearly as many cheap tax preparers helping people "get their money back" but really trying instead to make them a loan on it.

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I just find it amazing how many people have no idea how taxes and tax filing works.  I got into an argument with someone on Facebook who said his taxes went up because he got  much smaller refund.  I told him the size of the refund tells you nothing.  You have to take your federal withholding and subtract the refund to see how much you paid.  Then take that amount divided by income to get an effective rate.  He kept telling me I was a full of it liberal.  Some people just don't get it. <rant over>

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People have no concept of how it works.  They pay HR Block to do it for them.

 

down4cle[/member] I used to work as a VITA preparer in Cincy about 10 years back and the big push was to get people to come in and file their taxes period. Most people had the assumption that they did not make much money or have much of an income at all and they felt the government was going to take more of it away if they filed, when in fact they would be getting EITC credit and cash assistance. At the time, Cincinnati was leaving millions of dollars on the table because their residents were not filing taxes and receiving EITC credits. THis money was going to other cities instead of being captured in Cincy.  People just need to be educated, maybe in school on why we file taxes good, bad and ugly, instead of just learning the horror stories you hear in the media.

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^The fact that taxes are so effing complicated and tedious no doubt dissuades some people from filing, which is a bummer.  It's too bad "tax simplification" has been disingenuously co-opted by the flat tax crew.

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I just find it amazing how many people have no idea how taxes and tax filing works.  I got into an argument with someone on Facebook who said his taxes went up because he got  much smaller refund.  I told him the size of the refund tells you nothing.  You have to take your federal withholding and subtract the refund to see how much you paid.  Then take that amount divided by income to get an effective rate.  He kept telling me I was a full of it liberal.  Some people just don't get it. <rant over>

 

People like that get undeservedly elevated on there -- and Facebook wonders why educated people stopped going. Facebook wants forums gone since that's where the real solutions are found.

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People have no concept of how it works.  They pay HR Block to do it for them.

 

down4cle[/member] I used to work as a VITA preparer in Cincy about 10 years back and the big push was to get people to come in and file their taxes period. Most people had the assumption that they did not make much money or have much of an income at all and they felt the government was going to take more of it away if they filed, when in fact they would be getting EITC credit and cash assistance. At the time, Cincinnati was leaving millions of dollars on the table because their residents were not filing taxes and receiving EITC credits. THis money was going to other cities instead of being captured in Cincy.  People just need to be educated, maybe in school on why we file taxes good, bad and ugly, instead of just learning the horror stories you hear in the media.

 

The amount of small businesses that under report their income to avoid taxes has a similar problem.  Many of these businesses would likely have enough deduction to offset earning while still mitigating their tax liability.  What they do by under reporting (aside from breaking the law) is make it harder to grow their business because they can't get a bank to lend based on their revenue stream. 

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^^The "mortgage interest deduction" (in this context) only applies to primary and second homes, not investment or commercial properties, which get their own tax treatment.  And some individual homeowners will still benefit from it in this scenario, but only those who earn so much money, own such an expensive house, and have such a big mortgage, that it makes sense to itemize instead of taking the standard deduction. In other words, the people for whom there is literally zero policy justification to provide a lavish tax subsidy to their housing consumption. It's like having a special tax break aimed solely to reduce the costs to upper middle class people of buying organic meat.

 

You might be right that the MID so entrenched that it can't be killed, but that doesn't make it anything like Obamacare, which still has plenty of policy-based defenders. You will literally find almost zero disinterested economist of any prominence, of any political stripe, who support even the current MID. It's ultimate dog of a policy. A random lottery awarding big tax breaks to people makes more policy sense.

 

For many Americans, this is the only sizable deduction they get.  Therefore it will be extremely hard to get rid of.

 

Upping the standard deduction (doubling it, in the current proposal) will render it obsolete.  Same for charitable donations for anyone making less than $100K/year, most likely.


Very Stable Genius

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I just find it amazing how many people have no idea how taxes and tax filing works.  I got into an argument with someone on Facebook who said his taxes went up because he got  much smaller refund.  I told him the size of the refund tells you nothing.  You have to take your federal withholding and subtract the refund to see how much you paid.  Then take that amount divided by income to get an effective rate.  He kept telling me I was a full of it liberal.  Some people just don't get it. <rant over>

 

My 8th grade math teacher brought in a stack of 1040EZ's she got from the library (do they still lay out tax forms at the neighborhood libraries?) and had us fill out different scenarios.  The next week she had us fill out the same scenarios on the regular 1040 and I think the Ohio state tax form as well.  I seem to recall everyone getting through these exercises pretty easily.  So I feel pretty safe in saying filing taxes manually is doable for anyone with an 8th grade education.  Filling them out with turbotax or another online source is even easier. 

 

The scourge of tax illiteracy helps explain why 401k/IRA and HSA participation is so low.  I quickly explained how an HSA works to a coworker and it totally blew his mind.  People don't even know what tax bracket they're in so they don't realize how much they'd save on medical bills with an HSA. 

 

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They still have the forms at the library.  That is how I still file my taxes.  I like to go through it manually so that I understand the nuances.  You are correct to a degree about 401ks and HSAs.  I think participation is low because people live above their means and/or have low incomes and can't afford any reduction in take hoe pay.

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People like that get undeservedly elevated on there -- and Facebook wonders why educated people stopped going. They want forums gone since that's where the real solutions are found.

 

Unmoderated debates don't work.  Never have, never will.  The difference now is that you can post a link to THE FACTS and the Facebook idiot will double down on his original assertion.  Or if he realizes he's wrong he'll kick the ball in the sewer and declare himself the winner. 

 

 

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The scourge of tax illiteracy helps explain why 401k/IRA and HSA participation is so low.  I quickly explained how an HSA works to a coworker and it totally blew his mind.  People don't even know what tax bracket they're in so they don't realize how much they'd save on medical bills with an HSA.

 

The HSA is the ultimate tax saving/retirement hack.  It obviously helps if your medical bills are minimal the first few years starting out, so you can invest it and let it grow (tax free).  In a perfect scenario, the balance would build up to be greater than your out of pocket max on your insurance plan....leaving you with never having any risk to pay your medical bills with take home income if you don't want.

 

I invest everything I can in my HSA (they require a $1,000 "cash" holdback) and then if I do have medical bills come up, I put in a credit card I'm using for travel hacking and then pay myself out of my HSA if I need the cash reimbursement.  Tax deductible contributions, tax free growth, tax free withdrawals...and in a pinch, can still put bills on a card towards min. spending requirement.  Amazing!


Very Stable Genius

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They still have the forms at the library.  That is how I still file my taxes.  I like to go through it manually so that I understand the nuances.  You are correct to a degree about 401ks and HSAs.  I think participation is low because people live above their means and/or have low incomes and can't afford any reduction in take hoe pay.

 

Please tell me that's a typo.


"Someone is sitting in the shade today because someone planted a tree a long time ago." - Warren Buffett 

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My 8th grade math teacher brought in a stack of 1040EZ's she got from the library (do they still lay out tax forms at the neighborhood libraries?) and had us fill out different scenarios.  The next week she had us fill out the same scenarios on the regular 1040 and I think the Ohio state tax form as well.  I seem to recall everyone getting through these exercises pretty easily.  So I feel pretty safe in saying filing taxes manually is doable for anyone with an 8th grade education.  Filling them out with turbotax or another online source is even easier. 

 

 

Would there even be time for this today with all these stupid tests the kids take? Teachers don't get to teach kids about life anymore, just how to pass tests. I don't see why the goal is to max out kids' RAM rather than their processors and hard drives. RAM is volatile and is constantly erased. That's how you wind up with all these people not knowing how anything works.

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^ In all fairness, did you learn anything about doing taxes and filing when you were in high school either in a civics or intro to economics class? This is something that is required of every American yet at no time has the education system addressed this. If the IRS wonders why so many people don't file taxes, maybe providing a little bit of education on the matter to students could be a start. Heck even a one time 20 minute lecture would yield huge dividends.

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