2017 Income Tax Proposal

So, the budget wrangling is behind us for another 10 months anyway.  One of the items left on the cutting room floor was a proposal to increase tax rates and eliminate itemized deductions.  Like an incoming tide, some proposals tend to break and recede only to have the next wave come in a bit higher.  I read a great deal of talk online about the budget being balanced on the backs of this or that group so I thought I’d crunch a few numbers and see where we stand:

All the below scenarios assume married filing jointly with all other things held constant (ignores the deductibility of state taxes paid on the federal return):

If the joint family adjusted gross income was $50,000 and there were $7,000 in itemized deductions, you would pay $236 less ($1,764 vs. $2,000) under the proposed tax rules than you would under the current rules.  The doubling of the standard deduction (from $6,500 to $13,000 for married filing jointly) will provide a significant benefit to most filers in lower brackets.

A family with an AGI of $100,000 and $10,000 of itemized deductions, would pay $15 less under the new rules ($4,908 vs. $4,924).

AGI of $200,000 and $20,000 in itemized deductions = $900 more ($11,764 – $10,864)

AGI of $500,000 and $30,000 itemized = $2,610 more ($32,614 – $30,004)

AGI of $1,000,000 and $50,000 itemized = $5,680 more ($67,364 – 61,684)

AGI of $2,000,000 and $100,000 itemized = $12,480 more ($136,864 – $124,384)

An extra $12,480 for someone making $2 million might not sound like a lot but consider that there are currently 7 states with no income tax at all (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming).   Economists have a term for those who seek to legally minimize their taxes; rational.  Many folks in the higher brackets have vacation homes in other states already and changing home states could be as simple as spending a couple more weeks under the other roof and changing their driver’s license.  Saving $136K annually provides a significant incentive to do so.

If you live above the canal, you are probably not more than 20 miles from Pennsylvania with its flat 3.07% rate.  The point at which DE and PA residents would pay equal amounts of income tax under the proposed DE plan is approximately $41,500 (ignores the fact that 401K contributions are taxable in PA).  A family with $200,000 would pay close to twice as much income tax in Delaware.  Obviously sales tax, property taxes and schools weigh heavily into the decision as well.

Of course the elimination of the estate tax is designed to retain the high income folks, but I’d have a tough time coming up with a good marketing slogan for that.

A top tax rate of 6.95% would rank “tax-friendly” Delaware at 15th of 51 (states plus DC) in terms of the highest top bracket rate.   At 5 of the 14 states with rates higher than 6.95%, the top rate starts at $500,000 or higher, well above Delaware’s $150,000 most likely indicating that Delaware would wind up higher in several of those states as well in many scenarios.

In most scenarios, the rate increases are not the largest determining factor in the change in taxes up or down; the curtailment of the itemized deduction is.  It is not possible to measure the societal impact of essentially removing the deductibility of charitable contributions and mortgage interest – the two most popular.  But I think its safe to say that it will not improve things for two of the groups hardest hit by the 12th hour budget changes this most recent time around (from the increased realty transfer tax and the slashing of Grant in Aid).  Those deductions in particular are designed to incent positive behaviors (home ownership and support of nonprofits) that are beneficial to the state.  How much harm their removal will cause should give legislators some pause as the calendar begins to wind down to 6/30/2018.

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