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Who Feels the Tax Sting

Courtesy of Tim Knight, Slope of Hope

Now that the massive new tax bill has passed, I thought I'd do a little experiment with a spreadsheet to see how a hypothetical Silicon Valley, California earner might be affected. I was sure his tax bill would be higher, but I am stunned at how much higher. In fact, I think when people are filling out their taxes in early 2019, they're going to drop dead with shock, because the tax increases are so massive that I suspect more than a few families – - thousands, tens of thousands, or even more – - won't even be able to stay in their homes since their tax bite is so massive.

I will preface this by saying I'm not a tax expert, but I've got a pretty good understanding of taxes, and I put together a deliberately simplistic spreadsheet for this experiment. And while it may be simplistic, it still makes a powerful point, and the tiny amount of rounding error for an actual tax form won't change the conclusion.

In this examination, I make the following assumptions:

  • The individual earns a handsome salary of $300,000
  • He bought a $5 million house in Palo Alto (which, given the prices around here, would be a nice four bedroom house – - nothing extraordinary). He put $1 million down and has a $4 million mortgage at an interest rate of 4%. (I know this seems like a very expensive house based on his salary, but just go with me on this………)
  • He pays property tax of 1.2%
  • His state income tax rate comes in at 9%. (California is actually 13.3%, but I'm making it a little lower to take into account lower income levels aren't taxed as highly.)
  • His federal income tax rate is 30% (again, the actual highest rate is 37%, which is the new rate, reduced from 39.6%, but for this experiment, I'm moving it down quite a bit).

So here is the spreadsheet. I want to stress this is extremely simplified (hey, almost a tax return on a postcard!) but here we go:

taxsheet

In the left column, which is "pre-reform", this person has state income tax and property tax totaling $87,000, which he can use to offset income for the purposes of calculating federal income tax. In the right column, he is limited to $10,000. So suddenly he's got an extra $77,000 in income which is taxed that wasn't taxed before.

Much worse, he's got $160,000 of mortgage interest to deduct in the "before" scenario. After the new tax plan kicks in, only the interest on the first $750,000 of that $4 million mortgage can be used, which strips it down to a mere $30,000. And, voila, another $130,000 of taxable income.

So, in the end, his federal tax bill of $15,900 has skyrocketed to $78,000. Think about that for a moment. This isn't a 3% or a 5% increase. This is a potentially life-changing, world-rocking, honey-we-have-to-leave-our-home QUINTUPLING of federal taxes.

Now some of you who live in places with lower (or no) state income taxes or inexpensive real estate may be thinking, "Awww, fuck 'em, those rich Californians." But this isn't some scumbug Goldman Sachs managing director who is making tens of millions of dollars. This is, in this area, just an upper-middle-class professional who lives in a house that would be considered quite ordinary. This isn't a bad person, like an investment banker. This is a smart engineer. And, frankly, I think this kind of tax hit would compel him to start renting an apartment instead.

I also don't have a personal ax to grind here. I bought my house so long ago, so cheaply, and I owe so little on it, that none of this applies to me personally. However, I think hardly any of those affected have any CLUE what is about to hit them. There is an enormous tidal wave heading toward huge masses of professionals in states like California, Washington, and New York that are about to have the rug pulled out from under their feet.

But, hey, what am I complaining about, with reassurances like this coming from the White House:

paycheck

Oh, and since I'm in the Silicon Valley…….

Our poor hypothetical taxpayer has one more indignity to suffer: between (1) rising interest rates (2) the loss of deductibility in state income taxes (3) the loss of deductibility in mortgage interest (4) the loss of deductibility in property taxes…………..his house is going to sink in value as it dawns on people how badly they've been screwed. So on top of massively higher expenditures to pay federal taxes (after all, SOMEONE has to pay for Bob Corker's tax cuts!), he's making payments on a diminishing asset.

Congratulations, America. You're not even sure what's hit you yet.


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  1. Well, this is all a faulty scenario to begin with. If our hard working gent has a $4,000,000 mortgage at 4%  for a 30 year mortgage his payments are $19, 096.61 per month. Even in the hay day of lending I don't know how one would push this through this through screening. The payments far out weighs his income to payment ratio. His payments are more then 76% of his gross pay. These mortgage payments more then likely exceed even his take home pay. I really don't know what lender would even look at this. I really can't consider the remainder of you argument b/c you start out with such outlandish blather. It must be your bias for those who have passed the tax bill.