Congressional Republicans have released their final plan for overhauling the federal tax code. The plan includes a number of changes that could significantly affect how much Californians pay in federal taxes. Here's a breakdown of what the bill's passage could mean for the state:
The GOP plan nearly doubles the standard deduction. For single filers, it would rise from $6,500 to $12,000. In exchange, a host of other write-offs would go away. That includes the $4,150 personal exemption, and significant chunks of the deduction for state and local taxes.
The latter change is a big deal for the one in three Californians who itemizes their taxes. Currently, they're deducting around $18,400 in state and local taxes, on average. But the GOP bill will cap the deduction at $10,000. And taxpayers will have to choose whether to deduct their property and income taxes, or their property and sales taxes. No longer will they be able to deduct all of them.
Loyola Law School tax law professor Katie Pratt said these changes turn out to be good for taxpayers who take the standard deduction every year, but will hit many of California's dual-income, home-owning families hard.
"There are a lot of very well-off Californians who are going to have whopping tax increases," she said.
New homebuyers will face new mortgage interest deduction limits
Currently, homeowners can deduct the interest they pay on mortgages up to $1 million. But Californians shopping for a home in today’s expensive housing market could take a hit under a new cap limiting the mortgage interest deduction to $750,000.
The change won't affect existing mortgages. But Pratt said that doesn't mean current homeowners will remain untouched by the tax bill.
She says when they go to sell their homes, they're likely to encounter buyers seeking lower prices, since there won't be as much tax benefit to owning an expensive home.
"Californians should be very concerned about the effect of the new limitation on the value of their property," Pratt said.
Californians who stand to benefit
Pratt said the biggest winners will be wealthy Californians who earn their income passively, such as investors or those who inherit their wealth. Others who can find ways to channel their ordinary income through LLCs or other "pass-through" business entities also stand to win.
"There will be a lot of gaming of the pass-through income rules," Pratt said.
Further down the income ladder, Pratt said parents who qualify for the child tax credit could also see their take-home pay increase. The credit doubles from $1,000 to $2,000 for each child. It's fully refundable up to $1,400 for workers paying payroll taxes but who don't make enough to be liable for federal income taxes.