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The 2017 tax plan – A look at a single parent return

First, the disclaimer. The proposed tax plan has so few details that it’s tough to discuss its impact with any degree of accuracy. I accept that caution, but so should all the people who are flag waving supporters of this plan. Last time, I wrote how a couple’s taxes might be affected, now let’s look at a single mom’s taxes. This mom has a good income, $60K/yr, and was left, from a death or divorce, with 2 children. She has a house, worth $260K with a $210K mortgage, putting the payment at $1000/month, or 20% of her monthly income. Her itemized deductions total $19,124. This includes mortgage interest, property tax, state tax, and donations. With 2 children, she has $12,150 in personal exemptions, and ends with a taxable $28,716 and a federal tax of $3,845. The new plan/proposal? She gets a standard deduction of $12,000. Since her mortgage interest and donations don’t exceed this, she doesn’t itemize. Her taxes are simple, to be sure. 10% of the taxable $48,000, or $4,800. Nearly $1,000 more.

What we don’t know is what extras will be offered to families with children, all we have is the vague line, “tax relief for families with child and dependent care expenses.” Hopefully, this will help, but keep in mind, the current Dependent Care FSA (flexible spending account) benefit is lost when the child turns 13. If you think your child’s cost drop at 13, you don’t have kids of your own. And I am still looking at the line, “Protect the home ownership and charitable gift tax deductions.” Home ownership, not interest, which again, gives us just enough ambiguity if the property tax deduction remains.

Can You Afford to Buy a Home?

Today, a Guest Post from Crystal –

Purchasing a home is a very real investment and there are a number of factors which need to be addressed. This involves much more than your financial liquidity alone. Let us take a look at some external variables which should be carefully considered well in advance. You will then be able to make the most appropriate decision when the time is right.

All About the Location

Every state is associated with its own set of housing prices. Mississippi, Indiana, and Michigan are currently the three cheapest states in terms of these costs. For instance, the median home value is Mississippi is $120,000 dollars. This is markedly lower than the nationwide average. However, this needs to be taken with a grain of salt. The average yearly salary within Mississippi is approximately $35,000 dollars; much lower when compared to areas such as New York or California. The other major concern is whether or not the state is a good state to live in. Cost of living, access to healthcare and average lifespans will naturally differ. Those states which offer the cheapest housing are often associated with lower values of these variables.

Fixed or Variable Interest Rates?

One of the benefits associated with choosing fixed interest rates is that they can make it easier to afford a home. However, this is assuming that predominant rates will rise. The other option is to opt for variable rates. The benefit here is that should these rates fall, your mortgage will not be as expensive. Still, rising rates may cause you to pay more than if you had selected a fixed plan. This is the reason why it is important to predict the long-term status of the interest rates set by the Federal Reserve.


Politics

Domestic politics will also play an important role. An example of this can be seen in the recent tax plan unveiled by the Trump administration. The president has campaigned with a pledge to reduce the overall tax burden on consumers and if he does indeed revitalize the domestic economy, this could prove beneficial in terms of house prices (as well as rises in average salaries). However, we have yet to see whether or not his proposals will become a reality. He still faces strong opposition from the democratic party and a tranche of his own supporters.

Potential Incentives?

From a general perspective, the single population tends to have more difficulty in purchasing a home due to a lack of a secondary income. Married couples and those over 50 years are generally associated with more available liquidity. Regardless of which applies to you, there are several incentive programs to consider. For example, the Federal Housing Administration (FHA) can provide you with a one-time loan. The Department of Veterans Affairs (VA) has similar packages in place if you served in the military. Some other options worth considering are:

  • The Good Neighbor Next Door program (for police personnel, firemen and teachers).
  • Fannie Mae and Freddie Mac loans.
  • Energy Efficient Mortgage (EEM) programs.
  • Local first-time buyer offers through banks and lending institutions.

It is always a good idea to research these in more detail.

The Overall Housing Market

From a general point of view, the United States housing market is considered to be quite strong when compared to a handful of years ago. This could signal that prices will rise. However, the market tends to follow the movement of salaries and other benchmark indicators. Many predict that the this sector will continue to perform well in the coming years.

The 2017 tax plan – A quick look at the impact to a couple

The daily press briefing was held last week and a new proposed tax plan was part of that briefing. What’s strange is that even less was revealed as compared to the details offered during the campaign. This is part of the one-pager that was handed out, the part that discusses individuals. I’m in favor of simplification, but also concerned about unintended consequences of how specific bits of the tax code affect the individual. The first thing I heard, and the sheet confirms, is that the standard deduction will be doubled. I won’t quibble over the use of ‘double’ when the current standard deduction is $12,600 for a couple, and they said $24,000 in the new plan. What continues to disturb me is what would be dropped. The plan says “home ownership,” which to me is both mortgage interest and property tax, yet, in the Q&A they only said mortgage interest.

The new standard deduction would certainly eliminate the need to itemize for a good number of those who do, but at what cost?

I mocked up a 2016 return for a couple. A professional couple, both with college degrees. Their combined income after their 401(k) deduction is $100K. Their itemized deductions start with the house, $16,000 in mortgage interest, and $8,000 property tax. Their state tax is $3427, and $10,000 in donations. This accounts for their Itemized deductions. They also have $16,200 in exemptions. Net taxable, $46,373, and a tax bill of $6,029.

Now, let’s consider, what we know of the new tax plan. No exemptions, no property tax or state tax deductions. They get to deduct their $16,000 in mortgage interest as well as the $10,000 in donations. This results in a net taxable $74,000, and even though we don’t know more than “3 brackets, 10%, 25%, 35%,” let’s hope for the best and assume the 10% applies up to the $75K first discussed last year. A new tax bill of $7,400.

A few points. This couple had nothing handed to them. In 2015, the average starting salary for college grads was $39,045. If this couple met at school, and their degrees were in STEM (science, technology, engineering, math) they could have started at $110K, combined. Instead our couple is out of school 10 years and has 2 kids. They saved to put 20% down on a $500K house, which is above the country’s average, but not high considering their proximity to the city.

I’ll be the first to say that I understand there may be little sympathy for a $100K couple, but this is just an example.

The $10/hr couple (or $40K/yr) with 2 kids used to have the same $16,200 exemption, plus a $12,600 standard deduction. They paid tax on $11,200 for a tax bill of $1,120. (I know, I ignored child tax credits here, so they may be at $0), but under the new plan, will be taxed on $16,000, for a $500 increase (we don’t know what the child tax credit will be in the new tax code, we only have the one-pager.)

It’s safe to say that repealing the ‘death tax’ won’t help the average American. This tax is likely to affect .2% of estates, that’s just 1 in 500. A couple would need to have assets worth $10.98M on their death before paying a dime in the estate tax. Those who want to eliminate it are the rare top of the economic ladder. Keep in mind, a couple worth, say $10B would pay a tax of nearly $4B. It would take a million families to pay an extra $4,000 to make up these lost taxes. Crazy to just eliminate this.

As we get more details, I’ll offer more analysis of how these changes might affect wage earners at different levels.

 

When @Rosie Retweeted

There’s a certain excitement when a celebrity or anyone you really admire responds to a tweet of yours. That sentiment may seem strange coming from a 50+ year old vs a teen ager, but I think that feeling of looking that actor, rock star, author in the eye and sharing a thought with them has shifted from the real world to the online one.

Now. Rosie O’Donnell. She grew up in New York, and is my age. So I caught her as a rising star as she gained popularity in the world of comedy. There are a lot of comedians out there, some better than others. But, when I say that Rosie is far and above, the one with the biggest heart, I don’t exaggerate. Let me repeat that. Biggest. Heart. Ever. From a Huffington Post article, “By 2005, she had already contributed well over $60,000,000 to charities focused on the health and well being of children.” It’s 12 years later, and I’m trying to find a current total, but even if we stop on the number, it’s insane. $60 million dollars.

I’ll be honest here. I liked her standup. My New York roots gave me a special love for stand up comedy, and the thrill of seeing a comedian on TV that you remember seeing on a small stage in the city, just getting started. When Rosie moved on to The View, I was working, and didn’t see her too much.

She hit my radar again when Trump, during a debate, answered a question about calling women pigs, with the line, “Only Rosie O’Donnell.” He went for the laugh, I suppose. It wasn’t funny then, and it’s not funny now. Here’s what is funny. Rosie has earned one name, and it’s not ‘pig,’ it’s ‘Philanthropist’.” Trump doesn’t release his tax returns, so we don’t know how much he donates, but from all the detective work the media have done, we know it’s close to zero.

Yesterday, in my admittedly juvenile attempt to get a retweet from Rosie, I tweeted the image to the left. We’ve heard about the wall. The $25B price tag. There’s so much wrong with this whole scenario, there’s no good place to start. The proposed government budget has a defunding of Meals on Wheels, a charity that helps to feed those in need. Yet, it’s pushing to build a wall that will be a symbol, and nothing more. Expensive, and ineffective, as I tweeted, the technology exists to defeat it. It’s called a ladder. Rosie has been pretty vocal on twitter about her distain for Trump and she liked this one, a retweet soon followed. Thanks, Rosie! Keep up all of your good work!

Rich Country / Poor People

The country has grown richer, a lot richer. Our total net worth, as reported by the Federal Reserve, and the WSJ graphic, has passed $92.8T. That’s Trillion, as in a “one” with 12 zeros. A trillion is also a million million, so $92.8T is $92.8 million times a million.

How many households are we talking? If we divide this huge treasure over the population, what are we worth, on average? Good question.

 

 

 

 

 

 

We are up to 119.03 million households in the US. When we divide, the result is $779,635.

As a country, this makes us pretty well off. The average family can own a paid-off house worth $235K, and still have $545K which, for retirees, can provide over $20K per year income. Combine this with another $20K in social security, for a couple, and the numbers still look good.

Not so fast.  The totals reported, the treasure of nearly $93 trillion dollars, fails to discuss one crucial factor, the distribution of this wealth.

CNN offered a look at how this wealth is distributed.

That leaves just 1% of the total pie for the entire bottom half of the population. Note that while that article was written in 2016, just before the election, it used data from 2013. The point remains, half are sharing just 1% of this wealth. I don’t have a solution, today I am just making an observation. The totals and the averages that are reported are meaningless without digging deeper. A $500K average doesn’t help when your family and 8 others have virtually nothing, but one family has $5M. Keep all this in mind when you see any articles that offer this type of news presented as if we are all somehow better off.

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