Your Tax Reform Questions Answered by WSJ's Tax Reporter
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This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whalen in New York. Tax reform is one of the most hotly anticipated and soon to be hotly debated topics in Washington. And in a lot of cases, the details are murky. Amid the blizzard of tax rules and regulations, the Wall Street Journal invited readers to inquire about how the tax plan as we know it currently would affect them. And WSJ tax reporter Laura Saunders joins us with some details. So, Laura, a lot of the details behind the tax plan will be sorted out in debate on Capitol Hill. But many readers were curious about the state and local tax deductions and how it might affect their property taxes.
Yes, a lot will be sorted out on Capitol Hill, and it's important to say what we don't know right now. We don't know what the rates will be. We don't know what the income is that the rates will apply to. We especially don't know how the plan will affect families with children. There's a lot of play in there. And so Trump says he wants a middle class tax cut, but that's going to be a hard thing to do given the money, you know, how the revenue and money works. The proposal has called for eliminating the state deductions for state and local income taxes, sales taxes and property taxes. So it would affect not just income taxes, but also property taxes. However, this is so unpopular. It would raise a lot of money, but it's so unpopular that lawmakers started backpedaling almost immediately.
So they might save part of it or part of it for the middle class or something like that. There are various proposals. One change would allow the deduction for property taxes, but not for state and local income taxes, or maybe giving a deduction or credit for either mortgage interest or state and local taxes. It's not clear.
It's been well documented in the Wall Street Journal and here on the podcasts that the state and local tax deductions would affect three states in large part with high-taxed residents. But the property tax for those residents, that's a big chunk of change.
Yes, it really is. And it's also how schools are financed locally and things like that. So the lawmakers may not be as hell-bent on changing property taxes because there's a lot of local control.
Now, readers have also raised concerns about health insurance premiums, but especially how it might pertain to small business owners.
I think it's a pretty good bet that small business owners will still be able to deduct their health premiums, health insurance premiums, on their business returns. It's not on a hit list. and right now you can do it on the front page of the return, not as an itemized deduction. The write-off for the health insurance premium cannot exceed your net income from the business, and also you can't get it if you're eligible for employer-subsidized insurance elsewhere, like if your spouse has coverage.
How will eliminating state and local tax deductions affect property taxes and high-tax states?
Even if the spouse doesn't take it, you can't take this deduction. Also, people have asked about health savings accounts deductions, and those look like a pretty safe bet.
All right. Speaking of health, one reader in particular raised the issue of his or her father's Alzheimer's care, which runs at about $105,000 a year. And that allows the father to pay no taxes on his Social Security or rental property income. Would he lose that benefit?
Yes, perhaps. This has raised a great uproar. They would get rid of the deduction for medical expenses. It's an odd deduction because it has a very high threshold. Very few people can take it. But when you can take it, it means that something is disastrously wrong. We talked to one reader who had ALS, and his out-of-pocket cost is $130,000 a year, and he deducts it right now. So people with dementia, people in nursing homes, things like that, this is something they're pushing back on. We don't know what will happen, but the plan foresees getting rid of that deduction.
Well, with an aging population, you would think that that expense of the deductions is just going to grow, right?
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