Question about Bush tax law changes?

[Sterlingdog]

I just recieved an email that states that Bush is proposing limiting or taking away mortagage interest deductions, and also making employer paid health insurance part of your income.  Can anyone verify if this is true?

If it is, it could be a huge financial hit to people in my situation.  That would take away my primary deduction while significantly increaing my taxable income.  I hope the person who emailed me is misinformed. 

I figured with everyone on this board that is politically knowledgeable and up-to-date on current happenings, someone will have heard of this by now, right?

[Sterlingdog]

Here's what I found:


The Swamp Known as Tax Reform
Killing the hated alternative minimum tax seems easy -- easy, that is, until politicians have to find ways of making up the shortfall
 By Howard Gleckman

Updated: 8:00 a.m. ET Oct. 12, 2005
The alternative minimum tax is the levy everyone loves to hate. The mysterious parallel tax system will require more than 3 million mostly upper-middle class families to pay thousands of dollars in unanticipated taxes this year. And if Congress doesn't fix some serious problems with the tax, up to 30 million taxpayers could be hit with it by the end of the decade.

That's why a tax-reform commission appointed by President Bush is looking for a way to repeal the dreaded tax. Yet the panel, which is due to complete its work Nov. 1, is coming to grips with a much tougher question: In an era of already-big federal budget deficits, how will it make up the money the Treasury will lose if the AMT is repealed. "We have a concept of where we want to go," says commission Co-chairman John Breaux, a former Democratic Senator from Louisiana, "We just don't have the details."

Ah, those pesky details. Repealing the AMT will be staggeringly expensive. The tax is expected to bring in $1.3 trillion over the next decade. In 2010 alone, it will generate $112 billion, according to the Urban-Brookings Tax Policy Center, which provides nonpartisan analysis of tax issues. Even in a tax system that generates nearly $2 trillion a year, that kind of dough isn't easy to come by.

WHAT'S LEFT? Tax rates could be raised, but that's not in the cards as long as George W. Bush is President. The only other alternative is to target a handful of popular deductions that save taxpayers hundreds of billions of dollars each year. On Oct. 11, panel members said they wanted to expand -- not cut -- one biggie: tax breaks for charitable giving.

Tax-free pension contributions and earnings are worth another $100 billion per year. But trimming them hardly fits Bush's vision of an ownership society -- which is largely built on tax-advantaged savings.

That leaves three immensely precious tax breaks: mortgage interest and other incentives aimed at homeownership, state and local taxes, and the value of employer-provided health insurance. At its Oct. 11 meeting, commission members expressed a willingness to tackle at least two of these -- housing and health insurance. And with that, they have begun to wade into very deep water.

"IMPOSSIBLE" POLITICS. Tax breaks for home ownership have been nearly sacred. Almost 40 million taxpayers claim the mortgage-interest deduction. And these extremely generous write-offs are built into housing prices, especially at the top end. That's because high-bracket taxpayers can write off up to a third of their monthly interest cost. Sellers know that and reflect those lower after-tax monthly payments in higher asking prices.

The panel could recommend a couple of ways to limit those tax breaks. It may suggest turning the deduction into a fixed credit of, say, $2,000 a year, or it could lower the current $1 million cap on deductible interest. MIT tax economist James Poterba, a panel member, concedes that messing with the mortgage deduction could give the housing markets a short-term jolt, but he says the pain could be eased if changes are phased in over a decade or more.

Still, such a idea is political dynamite. "The politics are impossible," says Leonard Burman of the Tax Policy Center. "Politicians do this at their peril."

HEALTH-INSURANCE HIT? Curbing the state and local tax deduction may be a little easier, but not much. President Reagan tried to do it in his landmark 1986 tax reform -- and failed. But AMT reformers say things have changed. The big difference: Taxpayers who are hit by the AMT lose the benefit of their state and local tax deduction anyway. They ought to be willing to give up that break if they can end the rest of their AMT nightmare. Perhaps. But it would still be a tough vote if the idea ever gets to Congress.

The most complicated of the tax breaks is aimed at the value of employer-sponsored health insurance. Today, companies take a tax deduction for the health coverage they provide their workers, just as they do for the wages they pay. But even though workers pay tax on wages, they don't pay on the value of their health benefits. And it is real money: this year, a typical employer-sponsored family policy will cost about $10,000.

The Bush panel is considering a plan to limit that tax break. While details are still being worked out, employees could only exclude from tax the value of policies worth about $11,000. If they have a gold-plated plan worth, say, $15,000, they would owe tax on the $4,000 difference.

CLOUDY FUTURE. This would be a dramatic change. Backers say it would help workers understand the true costs of health care and might cause them to buy medical care more prudently. Critics say it would raise the already-high cost of health care by pushing companies to offer less-generous plans.

And businesses worry that, rather than boosting taxes on workers, Washington could limit the deduction for companies. Economists say it makes no difference whether the change hits workers or employers. But try telling that to a CFO.

By next year, an embattled President Bush will have to decide whether to accept some or all of the panel's proposals and make tax reform the centerpiece of his domestic agenda. But if the debate over the AMT is any indication, even getting rid of a hated tax may prove a lot tougher than the White House hoped.

Copyright ? 2005 The McGraw-Hill Companies Inc. All rights

[SLCPUNK]

I also read something about the "no capital gains tax if you have lived in the house for two years" being lifted too. But don't know much about it. I just know they have been talking about it. Which would suck.

[Axl_owns_dexter]

Its simple.  Corporations are paying less and less in corporate taxes.  Take a look at the numbers since 1980.  I just read it in my accounting textbook, so look for a link yourself.  That tax has got to be made up somewhere.  Either government expenditures can be rolled back (lol....right like that will happen) or the middle class takes up more of the tax burden.  Not hard to figure that one out.

[SLCPUNK]

Its simple.  Corporations are paying less and less in corporate taxes.  Take a look at the numbers since 1980.  I just read it in my accounting textbook, so look for a link yourself.  That tax has got to be made up somewhere.  Either government expenditures can be rolled back (lol....right like that will happen) or the middle class takes up more of the tax burden.  Not hard to figure that one out.

I've been saying this for a while now. Some corporations actually got returns.....

[Sterlingdog]

If this is all to get rid of the Alternative Minimum tax, why?  I don't even know what it is, so I guess it didn't affect me.  But if they take away my homeowner's deduction and tax our health insurance, that would do some major damage to me financially.  I'm guessing somewhere around a $20,000 hit a year for me. And I'm not wealthy.  Just middle class.

Well if he proposes it, I just pray it doesn't pass.

[SLCPUNK]

I'm guessing somewhere around a $20,000 hit a year for me.

That's not chump change is it?

[Sterlingdog]

No, I own a house in California.  Mortgage interest deduction is huge in my world.  If they take that away, what's the incentive to buy a house?

[SLCPUNK]

No, I own a house in California.  Mortgage interest deduction is huge in my world.  If they take that away, what's the incentive to buy a house?

Not much. With the prices going up they way they have, that is enough. In California the income vs buying power is higher  because of the prices, so to not have those write offs could be a disaster for people.

To me, California is headed towards foreclosure city in the next 5 years, along with S Florida and other areas.

[Sterlingdog]

You are right about that.  The housing market where I am is already starting to slow down.  And alot of my neighbors are putting their houses up for sale, but they are staying on the market longer.  I have two relatives who have just opted to sell their houses and rent instead because renting costs less per month. If they take away our tax deduction, I think we'll see alot more of that.  So far, I'm not in over my head or anything, but if I have to up my withholding by a significant amount it will impact our way of life, well that and the gas prices and the heating prices on top of our already outrageous electric bills.  I might have to abandon social services for a higher paying job.  If there's one even out there.  This is getting depressing.

[SLCPUNK]

Do you have to stay in California?

You could probably make good money from the sale and go somwhere else.

Some people hate moving though.....But almost ANYWHERE is cheaper than California! LOL

I think the market is slowing down in many places. I think this is the begining of the end of the big real estate boom. If those credits were taken away, I'd sell my house, take the money and rent. Then maybe, if the market dips back down you could buy another house on the cheap.

The market went up and crashed in the 80's. Same with S Florida. I see it happening again with California. I talked to an appraiser and asked him what he thought of Florida in 5 years.....he said "foreclosure city, but it's not slowing down yet."

[Sterlingdog]

I love California.  My family is here, plus I love the weather.  I love the fact that I'm a short drive away from the beach, the mountains, tahoe, the redwoods, Disneyland.  There is a fantastic school district here for my daughter.  It would take alot to get me to leave.  Really, things would have to get pretty desperate for me to leave.  I could make alot of money if I sold my house now, but I'm not ready for that.  Its gone up $200,000 since I bought it, so I can afford for the value to drop a bit.  I'm holding on till the bitter end!  Really I feel like we just have to survive 3 more years. 

[SLCPUNK]

I love California.  My family is here, plus I love the weather.  I love the fact that I'm a short drive away from the beach, the mountains, tahoe, the redwoods, Disneyland.  There is a fantastic school district here for my daughter.  It would take alot to get me to leave.  Really, things would have to get pretty desperate for me to leave.  I could make alot of money if I sold my house now, but I'm not ready for that.  Its gone up $200,000 since I bought it, so I can afford for the value to drop a bit.  I'm holding on till the bitter end!  Really I feel like we just have to survive 3 more years. 

3 more years until what?

I thought you answer would sound like that. I don't blame you. No matter how nutty things get, if your family is around and you like the area....why would you want to leave?

There are some areas where 200k would pay cash for a home. Charlotte NC you can get a great home for 200k or even lower. I have no idea of what your standard of living is though. But just to give you an example. I am waiting for a little while longer in Fla then going back out west. My home is going up like mad here, and I could pay off half my mortgage in Utah already with the appreciation here. If it goes just a little more I could pay that note off. I'd be just fine with that.

I remember reading an article about people in your shoes. To an extent anyway. One family was in NJ, lived in this cramped little townhome with the kids sleeping on the foldout couch (I'm not saying you are living like this ok?). The father got a job transfer to Fla (this is before Fla got expensive) which he fought tooth and nail. He didn't want to go. Then they offered his wife a job with the company too, if they both went to Fla. They ended up taking it, and for the same price they paid in NJ, they had nice big home with a pool and their kids had their own rooms. Anyway, you get my point.

[Walk]

Sell the house and move to a red state. I recommend Georgia and South Carolina. You'll be happier for it. 

[sandman]

you live in CA? real estate will stay strong. don't fight the system. embrace it. play the game. anyone with a home has significant equity. and it sounds like you do not have a full appreciation for what you're net worth is (considering you own a home in CA).

get a home line of credit against that equity. buy another house and rent it. you'll pay 6% interest on the line of credit. meanwhile the second house will go up in value about 10% to 50% per year (depending on location). you could retire in about 3 years.