Republicans’ tax reform package hurts NY, NJ

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 that will strongly encourage business investment.

Two key tax nuisances are targeted for elimination:the alternative minimum tax (AMT) and the Pease limitation, which proportionately reduces itemized expenses for higher earners.

Unfortunately, the news is not all good.

The bills eliminate personal exemptions and the deductibility of state and local income taxes. In the House proposal, property taxes will remain available as an itemized deduction but with a cap of $,000 per year. The Senate bill would eliminate entirely the property tax deduction. 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 Senate bills reduce the deductibility of mortgage interest but in different ways. The House bill would 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 bills elimination of medical expenses as an itemized deduction. This will be particularly hard on senior citizens who no longer would be able to claim as deductions any medical insurance premiums, co-pays, pharmaceutical costs or long-term care premiums.

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 Andrew Cuomos office projects each household in New York State will pay on average more than $5,200 in taxes. Another analysis projects New Jersey resident families may pay thousands 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 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. Lets re-establish the maximum 15 percent long-term capital gains tax rate and offer reduced tax rates for small business owners that retain profits to invest in their companies.

It is important to remember that there is quite a distance to travel before either of these proposals become law. The Republicans have a slim majority in the Senate and Democrats are entrenched in their opposition of the reforms. How much progress ultimately will be made is very difficult to determine, so stay tuned.

David Tepp, owner of Tepp Financial Planning in Westfield, is a licensed CPA and certified as a financial planner by the American Institute of CPAs. Copyright 2017 BridgeTower Media. All Rights Reserved.

CREDIT: David Tepp