The Trump Tax Cuts’ Secret Santa

No one should have any doubt about the main impact of the Republican tax cuts. These tax cuts are about giving more money to the richest people in the country. After four decades of the largest upward redistribution in the history of the world, the Republican tax cuts give even more money to the big winners.

In TrumpWorld, that makes sense. Instead of spending money to rebuild our infrastructure, reduce greenhouse gas emissions, provide quality child care or affordable college, we’re going to hand more money to Donald Trump and his family and friends.

However, even in the cesspool known as the “Tax Cuts and Jobs Act,” there are some changes for the better. These are worth noting and expanding upon when saner creatures gain power.

Doubling the Standard Deduction

The first and perhaps most important item on this list is the doubling of the standard deduction. This is really a good thing; it means that the vast majority of people will have no reason to itemize their deductions. We will spend over $27 billion this year (an average of almost $200 per household) on fees associated with filing taxes. In addition, many people waste hours of their time preparing documents and then worrying about making mistakes. Anything we can do to make this process simpler and cheaper is for the good.

In fact, we should look to take this another step forward. In many European countries, it has long been the practice that the tax agency prepares people’s returns for them. This is relatively easy if they are taking the standard deduction. People are sent the returns, along with a refund or invoice for additional payments. If they believe the form is mistaken, they compile their documents and make their case. Otherwise, they are done. Their taxes have been calculated for them and they can spend their time and money on better things.

Limiting the Mortgage Interest Deduction

The second item on my list is reducing the limit on mortgage principal for which interest is deductible. Since this has caused a great deal of confusion, it is worth pointing out exactly what was done in this tax bill.

Under the old law, people could deduct interest on up to $1 million in mortgage debt. It is important to realize that this is not a limit on the size of the mortgage for which interest could be deducted. If someone has a mortgage of $1.1 million, under the old law they could deduct interest on $1 million but would be excluded from deducting the interest on the last $100,000.

This bill lowers this limit to $750,000. The impact of this reduction will be zero for the vast majority of homes in the country. Even in relatively high-cost areas like New York City and Washington, the impact will be limited. If a home sells for $900,000, it’s likely that the mortgage is not going to be much larger than $800,000, which means that the vast majority of the mortgage interest will still be deductible.^[1]

For homes that cost well over $1 million, where the owner is likely to have a mortgage of more than $1 million, this change means that the interest on $250,000 less of the mortgage can be deducted. Assuming a 4.0 percent interest rate, this costs the homeowner $10,000 in deductions on their returns. If they are in the new 37 percent top tax bracket, this means an increase in their tax bill of $3,700 a year.

The change that likely has more impact for the mortgage interest deduction is the doubling of the standard deduction. This means that it will make sense for a much smaller percentage of homeowners to itemize even if they could deduct all their mortgage interest. The total of people’s itemized deductions is unlikely to exceed their standard deduction and even if they do, the margin will often be small.

For example, if the sum of a couple’s itemized deductions, such as state and local property taxes, charitable contributions, and mortgage interest, comes to $25,000, this is just $1,000 more than their $24,000 standard deduction. If they are in the 24 percent bracket, their deductions collectively save them $240 a year on their taxes.