STUMP » Articles » Taxing Tuesday: Trying to Escape Property Taxes, Follow-the-Leader, More Married Couple TCJA Scenarios » 17 April 2018, 12:06

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America’s new great migration in search of lower property taxes

Rich Harty, co-owner of Chicago-based Harty Realty Group, has an unusual business model. As an exclusive buyer’s agent, Harty has spent the past few years leading house hunters farther afield than many expected when they started to search in his metro area.

As Harty, a lifelong Chicagoan, puts it, “I’m trying to convince them, let me show you what Wisconsin has to offer.”

Harty’s clients range from first-time buyers with sticker shock to people who’ve lived in and around Chicago all their lives. Each has a different story, but they share a common theme: many believe that Chicago-area property taxes are too high, and relief is just an hour away over the state line.

As a new report out Thursday demonstrates, Harty isn’t the only one realizing how big of an impact property taxes make on home-buying decisions.

Now, I didn’t have sticker shock with respect to my house or my taxes. I knew what I was getting into. I knew what I left back in North Carolina, too.

It was amusing when some of my New York City acquaintances relocated to North Carolina and were amazed how much house they could buy. I wasn’t amazed. Also, I told them, don’t expect some of the governmental services you get up here in Yankeeland (this is the case, for example, with my autistic son — we’re getting all sorts of education support for him through the school. I have friends with similarly developmentally disabled children, back in the south, and they are struggling. Even the ones who have money have trouble finding qualified help. Look, these sorts of services are expensive. I told them what we had up here… and you will be paying for it.)

There’s a nice interactive graphic at the link. They split it up by Trump or Clinton counties, but that’s misleading — California property taxes may be low (Prop. 13 result), but they aren’t a low tax state overall. You see high property taxes in Texas… but they don’t have a state income tax. It’s a trade-off.

Here’s a takeaway:

Cook County, where Chicago is located, had the biggest number of people leaving, but given a bigger starting population, those 45,360 leavers only made up 0.9% of the total.

Blomquist’s analysis of Census data showed that among all counties that had at least a 1% population increase, the average tax bill was $2,706, while in all counties with a least a 1% decline in population, the average was $3,900.

So. Can’t impose property taxes on the people not there.

FOLLOW NEW YORK INTO THE ABYSS

Now that New York has its “clever ideas” out there, other states plan to follow:

Eight states may follow New York’s workaround for SALT deduction limits

WASHINGTON — While New York has become the first state to enact a workaround of the $10,000 cap on the federal deduction for state and local taxes, eight other states are moving in that same direction, according to the National Conference of State Legislatures.

Congress capped the deduction of state and local taxes (SALT) to pay for other tax cuts enacted in December, including a reduction in the corporate tax rate to 21% from 35%.

In high tax states, the new cap will reduce the federal tax deduction for a significant number of households.

Local governments and school districts in New York levy a total of about $55 billion in property taxes annually.

New York Gov. Andrew Cuomo and the New York State Legislature reached agreement on March 30 to allow charitable trusts to accept tax deductible payments in lieu of state and local income taxes as well as local and school district property taxes.

Okay, I missed that part in last week’s piece.

Still, I am leery of joining in the “clever tricks”, though I am affected. Also, I pay both Connecticut and NY income taxes.

So.

The deduction allows 85% to 95% of the donations to be deductible on federal tax returns.

In addition, employers are allowed to implement a 5% payroll tax as a way of paying some of their employees’ state income taxes. The policy is targeted at employees with annual incomes of $40,000 or more.

“The employer has the option of paying a payroll tax on the salary they pay, which is still fully deductible rather than the employee paying an income tax,” Cuomo said Thursday at an Association for a Better New York event in Manhattan. “To defray the cost of the property tax increase we set up charitable entities, so that rather than paying a property tax, you can pay a charitable contribution which is still tax deductible.”

“At least eight other states are considering creating or expanding charitable funds that would allow tax payments to be converted into charitable contributions,” said Jackson Brainerd, a policy associate at NCSL.

They are: California, Illinois, Maryland, Nebraska, New Jersey, Rhode Island, Virginia and Washington.

Phew, not Connecticut (yet). I really don’t want to deal with this crap.

Especially when the IRS finally gets around (probably next year, if they really want to screw with people) to telling the states – “not even a nice try”:

The U.S. Treasury Department did not immediately respond to a request for comment about this workaround. Though in January Treasury Secretary Steven Mnuchin said deducting property taxes as charitable contributions would be “ridiculous.”

But the Internal Revenue Service and federal courts have issued rulings previously in support of the federal deductibility of state tax credits, according to a January paper released by eight law professors.
…..
The conservative Tax Foundation has questioned the legality of New York’s move. Jared Walczak, a senior policy analyst, described the New York law in an April 2 blog as a “charade” that the IRS is unlikely to go along with. “This is not a gift; it is a tax avoidance scheme,” he wrote.

Yes, because some state tax credits have been allowable deductions in the past does not mean all would be… especially since many of these were not allowable under AMT, which, far as I know, has not been knocked down in court (I don’t know if it’s ever been challenged in court, in any meaningful way, anyway – I’m not a tax lawyer).

Anyway, I do not want to invite an audit, or have to pay penalties later even if audits aren’t in order, so I’ll be sitting the 2018 tax year out for these clever schemes.

By the way, I’m still awaiting Tax Freedom Day – I happen to live in New York, the state with the worst tax burden via this metric:

You want to follow that, other states?

ILLINOIS: OF COURSE WE DO!

Illinois state lawmakers look for a Trump tax cap workaround:

State lawmakers are nearing a key test on whether Illinois will follow the lead of California, New York and other states and enact legislation designed to let Illinois taxpayers avoid a new cap on deducting state and local taxes on their federal income tax return.

Awaiting a final vote in the House is a bill sponsored by freshman Democrat Jonathan Carroll of Northbrook. The measure specifically would give taxpayers a credit against state income-tax liability for contributions to a new state-chartered charity that would be used to support public grade and high schools in the state.

…..
“The fact is, the new federal tax code inordinately hits states such as Illinois that have relatively high state and local taxes, Carroll told me. “I don’t understand why states such as ours should be hurt.”

Carroll said he could call the measure vote a House vote almost anytime now, and believes the outcome will be close but favorable. Other Springfield insiders say a House vote easily could be delayed until later in the spring as the House works on other matters.

But significantly, spokesmen for both House Speaker Mike Madigan and GOP Leader Jim Durkin say they favor passage. “The bill does have some appeal,” said Madigan spokesman Steve Brown. And given that the IRS recently approved prepayment of some property tax bills to avoid the caps, “Perhaps they’ll support this too.”

“Perhaps”

And perhaps they won’t.

What then?

Harmon has been researching both the California measure and a different idea in New York state that would allow employers to pay a fully-deductible payroll tax that could be written off on federal returns. But he said he’s decided the idea of a voluntary contribution to a charity makes sense, though there is “some question” whether the IRS will approve.
….

Some experts consider IRS rejection of such a plan as extremely likely, if only because charitable contributions are not supposed to confer a benefit on the donor. But the measure almost certainly would end up in court, with no firm timetable on when a decision would come.

Uh huh.

TAX BRACKET VISUALIZATION

From Vox:100 years of tax brackets, in one chart

Check it out, but they natter on about how “inequality increased” since the tax brackets have been reduced to a handful, from the peak of 56 brackets during WWI.

But as the graphic above shows, the US has historically taxed the very wealthy more than the somewhat wealthy — and way more than the middle class. In the 1960s, the tax brackets on the high end started to disappear, and during Ronald Reagan’s presidency we went down to just two brackets. That meant that many middle-class citizens were in the same tax bracket as millionaires.

Since the beginning of Reagan’s term, wealth inequality has been on the rise — with the gap between the top 0.1 percent and everyone else, including many quite affluent families, growing.

Now, this isn’t to say that more tax brackets is a good thing. In fact, if we wanted to do a little more math, we could get rid of brackets entirely and create some kind of formula that would tax an incrementally higher rate for every additional dollar you earn. But to think tax brackets are the reason taxes are so complicated completely misses the point.

Do you really think anybody paid the 90% marginal rate in the 1950s? It wasn’t just a matter of reducing the number of tax brackets — it was also getting rid of all sorts of deductions. The high income corp. execs of the past were on expense accounts — and that didn’t show up as their income. Mmm, three martini lunches (I’m more a prosecco gal for lunch)

And then there’s the distinction between wealth & income. Some people have modest incomes, but have built up quite a bit of wealth; others with very high incomes have massive debt (i.e., negative net worth). So. Which is it you want to bitch about — wealth or income?

Or, let me guess: embrace the power of “and”.

But let’s move that for a later date, I want to do a tax scenario that’s a bit different.

NEW TAX BILL: FINDING THE POINT OF PAIN

In earlier versions of playing with the Tax Foundation’s tax calculator, I used a specific set-up in terms of deductions (level dollar or level percent) and I tried the effects at different income levels.

What I’m going to do this time is put in a specific situation and find out where the people will end up paying more in taxes.

I’m going to start with a married couple, both making $80K/year in gross salary, and with 2 kids.

With the standard deduction, they will have a higher taxable income, but lower taxes:

There are interactions with having two minor children, and when credit for those children comes in. I’m not getting into the details, because when I look it up, it looks like this, and… I don’t work in tax, nor do I want to. Find someone else. I’m just testing out boundaries for this now. Spreadsheet where I’m trying this is here.

The new standard deduction is $24,000 so if I’m going to test the boundaries, I need to be itemizing more than $24,000 in this stuff. So I’m looking for deductions that are more than 15% of the gross income. Checking out this particular table of effective state and local tax rates, even California doesn’t get there. But hey, let’s push this to see what happens.

First: let’s have $10K on the mortgage interest deduction, $5K in charitable contributions, 5% state income tax ($8000), and 0 in property taxes. I’m not going to do screenshots of all the results – I’ll make a graph, but I want you to see what happens when I have $23,000 in deductions (so standard deduction still dominates in the new tax law).

Now, we haven’t hit the SALT cap with only $8K in state income taxes… so let’s see what happens as I put in more and more property taxes:

Obviously, once the state property tax gets to $2K, we hit the cap, and the result is level for post-TCJA.

There’s also a point at which the tax scales out for the people (I’m not sure how this works, but this is what is happening)..

Anyway, the crossover place for this couple was $15K — with the $8K in the state income taxes, that means they had to hit $23K in state tax deductions before they were paying more in federal income tax under the new law.

$23K in state taxes is 14.4% of their gross income. Again – I put in mortgage interest deduction ($10K) and charitable donations ($5K) so that the itemized deductions could (barely) get over the standard deduction.

I could start putting in other deductions, but this is getting pretty dang absurd.

The people who may have to pay more under the new law are in situations where they’re paying large amounts of state and local taxes. Hell, paying more in state & local taxes than federal taxes.

Let’s look at it from a difference point of view:

So it goes anywhere from a few percentage points less to a few percentage points more. And the $160,000 income for the household is at about 92nd percentile for individual earners — this is in the top 8%.

So yes, I understand high tax states want to milk these high income people themselves, and have the feds stuck with taxing the broad middle, but I’m not seeing what is in it for the feds to allow this state of affairs to continue.

Maybe the next tax reform effort can make the SALT cap $0…because with so many people falling under the standard deduction, you may as well.

Oh, I almost forgot…

HAPPY TAX DAY!

I did my taxes months ago, but I always check my retirement account on tax day, to make sure the allocations look okay.

Y’all can party.

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