The new tax bill was passed just before Christmas. It is, like it or not and I generally don’t, the law of the land.
Usually, federal taxes don’t have much impact on us locally. They go up, they go down, we get a refund--maybe like in the days of the Reagan and Bush tax cuts, an early check in the mail--but this is one is different.
The problem is that no one knows quite what to expect. The standard deduction has been changed, rates have been changed, particularly for extremely high earners (they get a really big tax break), and lots of rules regarding other deductions have been changed as well.
In particular, there is now a limit on the amount that can be deducted from federal tax returns on the amount we pay in state and local taxes (SALT). This deduction has been around ever since the beginning of the national income tax, and now it’s capped.
The new bill goes into effect immediately. In other words, the new rules apply starting with the money you made and the taxes you already paid, or owe, for 2017. A lot of average taxpayers, like me, are trying to sort out what it all means. So are a lot of local and state governments.
Tax accountants and tax preparers are working overtime. At the same time, the federal government is busy drawing up new regulations.
One thing that is going to affect many of us is the change in the state and local tax deduction. There never was a limit on how much could be deducted. Now, the cap is $10,000. A lot of people won’t have to worry about that. The median income in Stafford, that means half earn more than this amount and half earn less, is roughly $104,500. In Prince William County, the median income is $106,305.
That means your state tax bill, assuming no big credits or other deductions, is about $5,000. If you have a home valued at the median, which is roughly, $344,900, you’ll pay about $2,477 in local taxes. So, you’ll be able to deduct all of your state and local tax bill. That is, of course, unless your personal property taxes, car, motorcycle or mobile home, don’t push you past that edge; or, if you and your spouse, filing jointly, earn more than that median. That’s going to catch a lot of people.
However, as you move up the scale in house values and in income, it gets easier to go past the deduction cap. It’s a rough estimate, but between 30 percent and 35 percent of home owners and earners in Stafford could find themselves being capped out by the new deduction limit. As you move farther north, where incomes increase along with property values and taxes, the likelihood of running over the cap gets bigger. In Fairfax, it’s all but guaranteed that if you pay the median in income taxes and property taxes, you’re capped and will have a limit on your deduction.
No one is quite sure what the impact is going to be on local governments and property taxes. Stafford County’s Rockhill Supervisor Wendy Maurer, when asked to comment, felt it was just too early to tell.
For one thing, it might prompt local and state governments to be shy about raising taxes. Many would say “great,” but in growing communities with increasing demands for schools, community services and parks, that could prove a harsh restriction.
The new cap on state and local taxes, and the increase in the standard deduction, may also have an impact on the growth in housing prices. The state and local tax deduction is usually factored in with most house prices, but another change will be the increase in the standard deduction.
Currently, 44 percent of homeowners put their mortgage interest payment on their itemized deductions. Moody’s, the bond rating service, speculates that with the increase in the standard deduction, the number of itemizing taxpayers may fall to 14 percent. Which again would mean, that the tax savings of writing off mortgage interest might make large home purchases less attractive. They speculate that the level of increase in house prices in Northern Virginia, to include Stafford, will be -4 percent to -6 percent.
There are lots of other changes. Large earners, very large earners that is, and corporations will pay a lot less. Though it’s not clear whether middle or lower income tax payers will be that much better off.
As for the changes in the state and local taxes, how taxpayers and governments will react and what the consequences will be are still open questions.
David Kerr, a former member of the Stafford County School Board, is an instructor in political science at VCU and can be reached at StaffordNews@insidenova.com.