Trump's tax plan could be bad news for the housing market, charitable giving, and local governments

Before you go, we thought you'd like these...
Before you go close icon

President-elect Donald Trump's pick for treasury secretary, Steven Mnuchin, says the incoming administration is about to embark on the "largest tax change since Reagan." He made those comments on CNBC last week. The change he's referring to could have a big impact on mortgage interest deductions — a driver of the housing market — and weaken an incentive for charitable giving.

Key features of Trump's plan could also lead to changes with state and local government tax collection. It all comes down to standardized deductions — or the amount of write-offs you can claim without having to provide lots of documentation (or even spending money on any of the things you can write off). To be clear, only two things are certain at this point about the tax code under Trump's plan: it will look very different, and we don't fully know the details.

Trump's plan differs in some significant ways from one put forward by republican speaker of the house, Paul Ryan. And Trump's plan is vague in places and has changed during the campaign.

That said, here are some of Trump's major objectives:

  • The number of tax brackets will be reduced from seven to three. The highest tax rate will be 33%, but Mnuchin said that tax cut will be offset by reducing deductions and loopholes for the wealthy.
  • The standard deduction will go way up. Single filers will see the amount of income exempted from taxes rise from $6300 to $15,000. Married couples who file together will see their exemption go to $30,000. That means far fewer people will need to itemize deductions — which could change what many Americans spend on housing and charitable giving.
  • Itemized deductions could be capped. For the wealthy, this could have a big effect on how much they give to charity, and whether they can deduct state and local taxes, depending on how the law is ultimately written.

See photos of the treasury secretary:

10 PHOTOS
Treasury Secretary Steven Mnuchin
See Gallery
Treasury Secretary Steven Mnuchin

Steven Mnuchin, President-elect Trump's nominee for Treasury secretary, testifies during his Senate Finance Committee confirmation hearing in Dirksen Building, January 19, 2017.

(Photo By Tom Williams/CQ Roll Call)

Treasury Secretary nominee Steven Mnuchin sits with Vanessa Trump (R), wife of Donald Trump Jr, before a swearing-in ceremony for senior staff at the White House in Washington, DC January 22, 2017.

(REUTERS/Carlos Barria)

Incoming Trump administration Treasury Secretary nominee Steven Mnuchin departs after working a simulated crisis scenario during transition meetings at the Eisenhower Executive Office Building at the White House in Washington, U.S. January 13, 2017.

(REUTERS/Jonathan Ernst)

Producer Steve Bing (L) and Honoree Steven Mnuchin recipient of the Philanthropic Leadership Award attend The Kaleidoscope Ball - Designing The Future benefitting the UCLA Children's Discovery and Innovation Institute at Mattel Children's Hospital UCLA at Beverly Hills Hotel on April 17, 2013 in Beverly Hills, California.

(Photo by Jason Merritt/Getty Images for BWR)

Steven Mnuchin, Treasury secretary nominee for U.S. President Donald Trump, right, attends a swearing in ceremony of White House senior staff in the East Room of the White House in Washington, D.C., U.S., on Sunday, Jan. 22, 2017. Trump today mocked protesters who gathered for large demonstrations across the U.S. and the world on Saturday to signal discontent with his leadership, but later offered a more conciliatory tone, saying he recognized such marches as a hallmark of our democracy.

(Andrew Harrer/Bloomberg via Getty Images)

 Steve Mnuchin and Lousie Linton arrive at the Premiere of Warner Bros. Pictures' 'Jupiter Ascending' at TCL Chinese Theatre on February 2, 2015 in Hollywood, California.

(Photo by Frazer Harrison/Getty Images)

Heather Mnuchin and Steve Mnuchin attend The Art Show Gala to Benefit The Henry Street Settlement at The Seventh Regiment Armory on February 23, 2005 in New York City.

(Photo by Joe Schildhorn/Patrick McMullan via Getty Images)

Treasury Secretary nominee Steven Mnuchin attends the inaugural parade of U.S. President Donald Trump in Washington, January 20, 2017. Donald Trump was sworn in earlier as the 45th President of the United States.

(REUTERS/Lucas Jackson)

Donald Trumps' Treasury Secretary Steven Mnuchin arrives on the West Front of the U.S. Capitol on January 20, 2017 in Washington, DC. In today's inauguration ceremony Donald J. Trump becomes the 45th president of the United States.

(Photo by Win McNamee/Getty Images)

HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

Both Trump and Ryan say they want to simplify tax filing for most Americans. Independent analysts at the Tax Policy Center and the Tax Foundation agree that's likely. Of the roughly 143 million tax filers in the US, currently about 48 million of them itemize their deductions, which means they need detailed records of how much they gave to charity, paid in mortgage interest to a bank, and anything else that might offer a write-offs. That number would fall by more than half, to 22 million itemizers, if Trump's plan goes through.

Here are some of the effects that could have:

Mortgage interest deduction

The deductions for mortgage interest and charitable giving are "apple pie and baseball for the tax code," Richard Auxier, a research associate at the Tax Policy Center, told Business Insider.

That's why neither plan eliminates these deductions; that would be a political disaster.

However, "Trump's tax plan does effectively limit two itemized deductions without explicitly doing so," Kyle Pomerleau, director of federal projects at the Tax Foundation, told Business Insider. "By increasing the standard deduction, it reduces the number of itemizers."

Here's what Pomerleau means:

Let's say a single filer pays about $10,000 in mortgage interest in the first year she owns a home. That far exceeds the current $6,300 standard deduction, so she itemizes her deduction to claim a greater tax break. It's one reason she decided to buy rather than rent.

But under Trump's plan she's better off taking the standard deduction. Her taxes are simpler, but they're no longer significantly different than if she had rented. That's why industry groups are watching closely.

"Doing anything that would limit incentives for homeownership is a fundamental step in the wrong direction that could harm home values and keep more buyers on the sidelines," William E. Brown, the president of the National Association of Realtors said in a statement to Business Insider.

Michael Fratantoni, the chief economist at the Mortgage Bankers Association, told Business Insider that few would defend the current tax code's complexity, but "the other side of the argument is that mortgage interest deduction helps homeowners by lowering the cost of their interest on an after-tax basis," which is particularly effective for first-time buyers, he said.

Many economists, though, say the mortgage interest deduction does not actually incentivize more Americans to buy homes. But it does encourage those who do to spend more on housing, or buy a bigger home, which brings us to the next possible effect of these plans: it could push down home prices, especially in expensive cities like New York and San Francisco where the mortgage deduction takes some of the sting out of taking out jumbo loans to pay for small spaces.

"They might still own the house, but they won't pay as much" for it, Roberton Williams of the Tax Policy Center told Business Insider.

That said, many lower income Americans will have lower taxes, which will encourage them to spend money on all sorts of things, including housing, according to Todd Sinai of the University of Pennsylvania's Wharton School.

14 PHOTOS
Guide to commonly-used US tax forms
See Gallery
Guide to commonly-used US tax forms

The 1040 family of tax forms is for federal income tax and is absolutely essential for all.

The 1040EZ form is the simplest version and is typically filed by those who:

  • Have no dependents
  • Are younger than 65
  • Earned less than $100,000
  • Don’t plan to itemize deductions

Form 1040A is more comprehensive than 1040EZ, but simpler than the regular 1040. It's beneficial for those who earn less than $100,000 and don’t have self-employment income -- but who want to make adjustments to their taxable income, such as child tax credits or deductions for student-loan interest. Note that it doesn't allow for itemized deductions.

Form 1040 is filled out by those who make $100,000 or more, have self-employment income or plan to itemize deductions.

The W-2 is completed by employers document each employee's earnings for the calendar year. You will want to take a look at this tax form for important information you'll need to fill out your 1040, 1040A or 1040EZ. 
The 1098 form is filled out by those who:
  • paid interest on a mortgage
  • paid interest on a student loan 
  • paid college tuition
  • donated a motor vehicle to charity

The 1099 series is reports all income that isn’t salary, wages or tips, and must be reported on both the state and federal level.

1099-DIV reports dividends, distributions, capital gains and federal income tax withheld from investment accounts, including mutual fund accounts.

1099-INT trakcs interest income earned on investments.

1099-OID (Original Issue Discount) is provided if you received more than the stated redemption price on maturing bonds.

1099-MISC documents self-employment earnings, as well as miscellaneous income such as royalties, commissions or rents. It covers all non-employee income that is not derived from investments.

If you receive a refund that you're unable to pay in full, you can request a monthly installment plan using Form 9465.
Don't forget to notify the IRS if you move! Use Form 8822 to change your address with the Internal Revenue Service. Otherwise, notices, refunds paid with a paper check and other correspondence relating to your personal, gift and estate taxes will be sent to your former address.
Anyone who has been employed by a company has completed a Form W-9. The W-9 is used by employers for payroll purposes -- and the information on the W-9 is used to prepare employee paychecks during the year and W-2 forms at the end of the year. 
The W-4 is an IRS form completed for employers know how much money to withhold from your paycheck for federal taxes. Accurately completing your W-4 can both ensure you don't have a big balance due at tax time and also prevent you from overpaying your taxes.
HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

Feeling less charitable?

When that hypothetical homeowner above started itemizing her taxes to get the mortgage interest deduction, she likely became more generous, too — because once you start itemizing, every dollar you donate lowers your tax bill further.

Here again, the higher standard deduction under the Trump proposal means that this benefit of charitable giving would vanish for many taxpayers.

"As [the standard deduction] goes up, it's reducing the incentive for giving," David L Thompson, the vice president for public policy at the National Council of Nonprofits, told Business Insider.

But there's an even bigger threat to nonprofits: One version of Trump's tax plan proposes capping the wealthiest Americans' deductions to $100,000 for single filers, and twice that for those who are married. This means that wealthy couples who want to give a a million dollars to fight poverty or put their names on a college building would now only be able to deduct a fifth of that.

"Clearly we feel strongly on that," Thompson said, adding that data from states that have capped deductions show it seriously hurt nonprofits, sometimes by amounts greater than the additional revenue the government brought in.

On top of that, there's another reason wealthy givers may be disincentivized to be generous under the tax plans: a lower top tax bracket also means donors save less on their taxes when they give.

Right now, "if you're a high income tax payer [donating to charity], you're getting 39 cents on the dollar," Pomerleau of the Tax Foundation said. "If you take it from 39.6% to 33 percent, you've automatically reduced the incentive right there."

Given the popularity of charitable deductions, this is a benefit that could end up surviving without a cap in a final tax plan. The Ryan plan, for instance, preserves the charitable giving tax break. Pomerleau said there are other options, too. The government could give directly to charities, or write checks to Americans who give.

State and local governments

Our current tax system makes it easier for state and local governments to raise your taxes. That's because those property, sales, and income taxes are deductible from your federal earnings.

"Some consider it an implicit subsidy to state and local governments," Pomerleau said. "When they increase their taxes, they're passing their burden to the federal government. At the margin, it allows states and local governments to increase taxes."

For wealthy Americans living in higher-tax states like California and New York, it can be a big tax break at the 39.6 percent bracket. So those wealthy residents are less likely to complain to their state house. The states with higher taxes tend to be more liberal. And the various tax plans differ on whether they completely or partially eliminate the subsidy for local taxes.

Pomerleau said this is likely to spark a big debate in Congress.

"From a policy standpoint, limiting the state and local deduction requires states to have their citizens realize the full burden of their taxation," he said. State and local leaders would have to say, "We're providing you these services, we think they're valuable, so we're going to sell them on their merits, rather than passing some of it onto the federal government."

It's unclear if eliminating this deduction would actually lead to higher or lower taxes at the local level. Auxier of the Tax Policy Center said past experiences suggest the effect could be minimal. States didn't lower taxes during a brief period in the 1980s when the deduction was eliminated. And when the top tax rate went from 35 to roughly 39 percent in 2012, states didn't take advantage by raising taxes.

"A lot of states don't want to see it go because of the advantage it gives them. But what states do is an open question," he said.

Some in the middle class could be worse off

There are other big changes and effects from Trump's tax proposal. Despite caps on total deductions, the wealthy may still benefit greatly from much lower taxes on business income.

Two changes in the plan could also increase taxes for many middle class families. First, it eliminates personal exemptions, which are about $4000 for individuals and each of their children or dependents. Second, it eliminates the "head of household" tax filing status that's typically used by single parents. So, "millions" of families with many kids, and single parents could end up with higher taxes under Trump's proposal, according to an analysis by Lily Batchelder of NYU School of Law.

"All heads of household would be made worse off," Roberton Williams of the Tax Policy Center said.

Mnuchin, Trump's treasury pick, told CNBC that the incoming administration doesn't "believe in that analysis." And he left open the possibility that this could be fixed in a final plan, adding, "When we work with Congress and go through this, it will be very clear. This is a middle income tax cut." It'll be up to congress to decide the ultimate winners and losers in the tax changes that are likely in the next year.

NOW WATCH: Here's what happens when interest rates go negative

See Also:

SEE ALSO: US homeowners get a huge tax break almost nobody knows about, and it's even part of GDP

SEE ALSO: There's another way people in expensive cities are 'penalized,' and they might not know it

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners

20 Folks Recall Shocking Interview Moments That Made Them NOT Want the Job 20 Folks Recall Shocking Interview Moments That Made Them NOT Want the Job
Man Suspects His Wife Is Cheating On Him - Then His Daughter Reveals What's Really Going Man Suspects His Wife Is Cheating On Him - Then His Daughter Reveals What's Really Going
Nature Gets Revenge On Safari Hunter Who Killed Elephants And Lions For Sport Nature Gets Revenge On Safari Hunter Who Killed Elephants And Lions For Sport