This is a good point on par with the purpose of the thread which is discussing strategies to look for if the tax changes are approved.
Mortgage interest deductions won’t be eliminated but the increased standard deduction means fewer people will itemize, reducing the incentive for paying more for a home. Sorry to repeat your points dealmaster00 but I think this is worth emphasizing. I think people over value the mortgage interest deduction than its actual benefit but if it is not as big a factor for many homeowners it will create downward pressure on the housing prices. May be worth holding off on buying a house to see what happens.
At the medium to high end and in high income tax markets it will hurt, but in most of America where the median home price is less than a quarter million, it will not have much difference. At today’s rates, a $200,000 mortgage will pay about $6,500 a year in interest, and the delta between the MID, property taxes, and SALT for an average married couple might be a few hundred bucks at most. There are other reasons to own property other than the tax deduction. The biggest would be not paying taxes on the imputed rent, and of the tax free gain when selling a home. Imputed Rent: a Big Hidden Tax Break for Homeowners
It may only be a few hundred dollars in difference at current rates on a $200k home but as interest rates rise that doubles the downward pressure on house prices. One could argue though that because the standard deduction increases, mid-low income households are better off because they get a better tax break so it’s a wash, but the incentive for buying a more expensive home to benefit from the tax savings is either gone or reduced which would affect the housing market price and in some cases - affordability.
I don’t understand imputed rent argument at all? Couldn’t you do the same with any asset? You can rent anything. TVs, computers, furniture, etc. Why single out housing?
There’s no tax break for financing your car or TV (instead of renting it), but there currently is for houses via the mortgage tax deduction. If that goes away, it will make renting more favorable vs owning, at least superficially. In practice, it will depend on how the rent and own market prices move in light of this, which could be either way. Still, if you had to guess, removing the mortgage deduction would probably lower housing prices since cashflow based buyers are less able to afford a given purchase price without the tax break.
That said, I’m pretty sure the “affordable housing” advocates aren’t going to come out to the woodwork to support this, so who knows if it passes. They should though - this is just the government propping up housing prices artificially (which they have been doing with the Fed’s low rates also).
“Lobbyists and others in the retirement and financial services industries who have spoken to congressional staff and committee members say lawmakers are looking at proposals that would allow 401(k) participants to contribute significantly less than what is currently allowed in a traditional tax-deferred 401(k). An often mentioned amount is $2,400 a year. It isn’t clear whether that would only apply to 401(k)s or IRAs or both.”
“Under some of the proposals being floated, contributions above the amount set for tax-deferred savings would have to go into a Roth account. The change wouldn’t affect existing balances in traditional 401(k)s and IRAs, those people said, and it is likely that any matching contribution from an employer would continue to go into a tax-deferred 401(k) account.”
The financial interests are more powerful than the realtors and like taking their fees out of accounts on a percentage basis. Contributions to 401k would drop dramatically. If the GOP wanted to bring about a “universal savings account” and replace tax deductible savings with an account with tax free gains that had an equivalent to the sum of IRA + 401k, that would be more revolutionary, but this is tinkering at the margins stuff that pisses people off. https://www.accountingweb.com/practice/clients/tax-free-universal-savings-accounts-proposed-in-congress
This will be the first year you won’t be able to get away with simply ignoring the question on your tax return asking whether or not you had health insurance.
So it seems like one way to use this information is to switch to doing as much traditional 401k as possible until things change. This would still allow some tax diversity gained currently by splitting contributions between Roth and traditional.
I’d read that Rothifying now would give the federal government more money in the short-term, the next 10 years, but it would hurt them long-term. And then what are they going to do, when there is no more pre-tax money left to tax? Oh wait…
Yeah, the thing with Roth money is that right now there’s so little of it, since it’s hard to contribute a lot and hasn’t existed for long enough to really grow compared to pretax money, that it’s relatively safe from the thieving politicians. The big pot of pretax money is an easier target, and all they have to do is raise taxes since it’s already hostage. But if too much money ends up Roth, you can bet they’ll start proposing “means testing” and reneging on the tax free promise just like they did on Social Security.
I get that the elimination of the MID would make homes drop in value (Fed reserve paper on it says 6-7%). I don’t get why some countries impute rent on homeowners…and why I should consider it a tax savings.
They do it because they can, and you can consider it savings because it could be done, but is not .
I think it’s a stupid idea and I’m surprised it even exists. The simplified graphic in the article shows two people who buy two homes and rent them from each other, then pay income tax on the rental income, which wouldn’t exist if they lived in their own homes. I suspect the reality would be quite different, at least under current tax laws in this country, because there are certain expenses that aren’t deductible to homeowners but are deductible to landlords, like property maintenance and property taxes (I know these are itemizable for homeowners, but landlords can just deduct them, so bear with me). These expenses could be huge, and the landlords could charge each other artificially low rent (or even market rent if there’s enough mortgage interest to deduct), so they could actually pay less income taxes as landlords than as homeowners. I floated this idea on FWF ~9 years ago – two close and trusted friends/relatives living in substantially similar (in terms of value and rent) properties would be better off financially if they rented from each other than if they lived in the unit they owned.
Eliminating the mortgage interest deduction also hurts new/prospective homeowners a lot more than longer time homeowners. Because mortgage interest is much higher at the beginning of a mortgage, the deductions are greater. The longer you’ve had your mortgage, the less interest you are paying and the smaller deduction you have.
I’m thinking I should have taken a 401k loan this year instead of reducing my contributions for home renovations. Oh well. Bumped up my contributions for the last few paychecks of the year to get me close to the max.
Absolutely. It could help prospective homeowners over time. However, those price adjustments will take time to happen. I was more referring to short-term prospective homeowners.
Very little discussion about what this bill is really about…and that’s cutting corporate taxes. That’s really the meat and bones of the entire thing.
Knowing that just cutting Corp taxes isn’t very politically palatable…the generic talking point of “cutting middle class taxes” has to be somehow included.
But then you’ve got to get the numbers to somewhat balance…because they are attempting to pass this via Reconciliation…so there is a limit to what they can add to the deficit.
You don’t need to be a math or tax major to realize that tax burdens are going to have to go up for certain segments of the population to make all of this work. And that’s why you are going to see things like the 401k caps come way down being included.
I’d venture to guess this plan will be a net negative for most people on this forum…just a hunch. But be prepared for some unpleasant details when this is released next week.
It actually could be, but the problem is they aren’t willing to pay for it in one of the more logical ways. Let’s say for simplicity that corporate income tax revenues are $330B. Capital gains benefits cost about $100B. Step up at death costs about $50B. I’m making these numbers up, but it’s something similar to this. The effect of dropping statutory rates down to 15% would cost less than $150B.
Of course, there are other reasons for the capital gains preferential rates, but just pointing this out as an example. Since corporate income taxes only account for ~10% of federal tax revenues, decreasing the corporate tax rates can be made up relatively easily by eliminating a couple personal deductions or just slightly increasing personal income tax rates. I’m actually a fan of eliminating corporate income taxes, imposing small net worth taxes, and increasing personal income tax rates, but there is basically no support for this because no one in Congress is willing to consider actually changing the system - they just want to play around with rates and specific deductions.
.