Watch carefully, New York and New Jersey – the tax proposals put forth by both the House and the Senate might have a significant impact on your tax returns.
On a positive note, the proposed bills offer a reduction of tax rates which will help most taxpayers. Both bills nearly double the standard deduction and relax limits on charitable deductions. Also quite favorable are increased caps on depreciation which will strongly encourage business investment.
The House bill proposes to eliminate two key tax nuisances: the alternative minimum tax (AMT) as well as the Pease limitation, which proportionately reduces itemized expenses for higher earners. Alternatively, the Senate bill would revise the AMT to increase the income threshold which will help many taxpayers.
Unfortunately, the news is not all good.
The bills eliminate personal exemptions and the deductibility of state and local income taxes. In both bills, property taxes will remain available as an itemized deduction but with a $10,000 per year cap. With New York and New Jersey residents enduring some of the highest state income and property tax rates in the country, this will have a massive impact.
Both the House and the Senate bill reduce the deductibility of mortgage interest but in different ways. The House bill will reduce the mortgage interest deduction for newly acquired homes with mortgages greater than $500,000 and prevents taxpayers from deducting interest on a second home. The Senate bill does not limit the mortgage interest but instead eliminates the deductibility of home equity loans. Both bills increase the amount of time taxpayers must live in their home for it to qualify for the capital gains tax exclusion.
Rather noteworthy is the House bill’s elimination of medical expenses as an itemized deduction. This will be particularly hard on senior citizens who will no longer be able to claim any medical insurance premiums, co-pays, pharmaceutical costs or long-term care premiums as deductions. The Senate bill not only retains the medical expense deduction but lowers the threshold from 10% to 7.5% of adjusted gross income. The Senate bill would also repeal the individual mandate to buy health insurance and the corresponding penalty.
If either bill passes in its current form, it may actually increase taxes for many individuals and families in New York and New Jersey. Governor Cuomo’s office projects that each household in New York state will pay several thousands more in taxes. Another analysis projects that New Jersey resident families may pay more as well. Without full deductions, New Jersey and New York are getting triple taxed on their income, essentially redistributing their tax dollars to other areas of the country.
Congress’ focus on reducing individual and corporate tax rates is laudable. However, to avoid punishing residents of areas with high property values, deductions for state and local income taxes, property taxes and mortgage interest should be allowed but, at most, reasonably capped. Those with higher health care costs have enough to worry about without losing the medical expense deduction. Additionally, long term investment should be appropriately rewarded. Let’s re-establish the maximum 15% long-term capital gains tax rate and offer reduced tax rates for small business owners that retain profits to invest in their companies.
While momentum is currently with the Republicans, there are important differences between the House and Senate bills. There is tremendous pressure on Congress to complete the unified legislation before the holidays and they appear to be ready to compromise. Stay tuned.