California’s high taxes, costly housing mean trouble under GOP tax plan

People who live in high-tax states with high housing prices would fare worst under the tax bill released by House Republicans Thursday.

Analysts are still poring over the details and crunching the numbers, but in general, “the bill is a large cut for businesses and a smaller tax cut for individuals,” said Howard Gleckman, a senior fellow with the Urban-Brookings Tax Policy Center.

The impact on individuals “will be very idiosyncratic. It depends on where you live, the makeup of your family, how you make your money,” Gleckman said.

A large family in a high-tax area with expensive housing would likely pay higher taxes than they do now. A working-class household in Peoria, Ill., depending on the family size, “may do pretty well,” Gleckman said.

The bill would cut the top corporate tax rate to 20 percent from 35 percent, and condense the number of individual tax rates to four — 12, 25, 35, and 39.6 percent. Today there are seven, ranging from 10 to 39.6 percent. However, the top tax rate would apply to taxable income over $1 million for married and $500,000 for single filers. Today it kicks in around $470,000 for married and $418,000 for single filers.

The bill would almost double the standard deduction to $24,000 for married couples and $12,000 for single filers, which means far fewer people would itemize deductions. However, large families could fare worse because it also would eliminate the personal exemption ($4,050) they can deduct for each member of the household, including college kids and adult dependents. Instead, it would increase the child tax credit to $1,600 from $1,000 for each child 16 and younger. It also would create a new “family credit,” equal to $300 for each parent and adult dependent, but this would expire after five years.

People in high-tax states could pay more. Today, if they itemize, they can deduct either state and local income or sales tax. California has the nation’s highest income tax rate at 13.3 percent.

People who itemize their deductions could still deduct their property taxes under the bill, but only up to $10,000 per year. Today there is no limit. If you bought a new California home for roughly $900,000 today, your state and local property taxes would be about $10,000 a year.

However, under current law, people who are subject to Alternative Minimum Tax get no benefit from the state and local income and property tax deductions. The bill would eliminate the AMT, taking the sting out of the loss of those deductions for those people.

The proposal would cap the mortgage interest deduction on new home loans. Today, homeowners can deduct interest on up to $1 million in mortgage debt used to buy, build or improve a first and second home, plus up to $100,000 in other mortgage debt (such as a home-equity loan used to buy a car). For existing mortgages, those rules would not change. But starting Nov. 2, if you took out a new loan, you could only deduct interest on up to $500,000 in mortgage debt on a principal residence and no interest on new home-equity debt.

The bill also would make it a little harder to shield capital gains tax on a home. Today, you can exclude up to $250,000 in capital gains ($500,000 if married) when you sell your house, as long as you have owned and used it as your primary residence for at least two of the past five years. The bill would change this to five of the past eight years.

The bill kills most tax benefits for higher education, including deductions for student loan interest and tuition and fees and the Lifetime Learning and Hope Scholarship credits. It retains the American Opportunity Tax Credit and extends it, albeit by half, for students taking a fifth year of college.

In a major change, profits from partnerships, sole proprietorships and other “pass-through” entities would be treated like business income and taxed at the top rate of 25 percent. Today it’s taxed like ordinary income at rates up to 39.6 percent. The bill includes complex “anti-abuse” provisions designed to prevent employees from becoming self-employed just to reduce their taxes.

The 429-page “Tax Cuts and Jobs Act’’ would almost double the estate-tax exemption to $10 million per person and kill the estate tax altogether after 2023.

It retains the Medicare surcharge on investment income and ordinary income above certain limits and the deduction for contributions to 401(k) plans. Cutting the latter has been suggested as a way to offset the cost of the plan, which is estimated at $1.5 trillion over 10 years.

Some surprises buried in the fine print: You would be able to make contributions to a 529 college savings plan for an unborn fetus, the tax credit for adoptions would be eliminated, and churches could make political statements, said William Gale of the Tax Policy Center.

The taxation of alimony would change for people getting divorced in the future. Today, the person getting the alimony claims it as income and the payer gets to deduct it. In the future, alimony would not be taxable or tax-deductible, putting it on the same footing as child support payments, Gale said.

Nicole Kaeding, an economist with the Tax Foundation, said the “vast majority” of Americans would get a tax cut under the plan. People who now claim large deductions for state and local income and property taxes and mortgage interest might not.

The bill’s author, Kevin Brady, R-Texas, said that a family of four making $59,000 a year would save almost $1,200.

Gene Sperling, who served as the principal economic policy adviser for Presidents Bill Clinton and Barack Obama, said in a new conference that the plan fails the test of “fiscal sanity, fairness and moral authority.” He criticized it for permanently cutting taxes for businesses and wealthy individuals, but providing smaller tax cuts for low- and middle-income families and making some of them temporary.

President Trump endorsed the tax plan and said he wants it passed by Thanksgiving.

Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender