Ask HN: How will the 2018 Tax Cut plan impact Engineers? | Hacker News Reader

Ask HN: How will the 2018 Tax Cut plan impact Engineers?

64 pointsbsvalley89 comments

Let’s say you’re a lucky Software Engineer who makes between $150-250k per year. How will the new 2018 tax plan help/hurt you? Let’s use HN’s brain to find out ;)

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My tech-friendly CPA has a nice newsletter that outlines some of the effects of the proposed tax bill:

http://mailchi.mp/2b465b061dd6/december-2017-clients?e=c3de0...

In short, engineers in CA/NY will see their taxes increase substantially because you can no longer deduct state income taxes.

The $500k mortgage interest deduction will also affect folks in states with expensive property, but current versions of the bill only apply this new limit to mortgages created after Nov 2, 2017.

If you are an engineer making a salary in the band you mentioned, this is most likely going to be a significant raise in your tax bill.

Thanks for sharing that, it's a great write-up.

One important consolation, for those of us who are savers. Corporate profits are likely to increase significantly (at least on a first-order basis). So if you own a lot of stock, I somewhat expect to see the return on that rise. This doesn't help folks who are just starting out, or else don't save much, but it is an offsetting change that may help some people reading this.

The senate version keeps the mortgage deduction at 1MM

Remains to be seen which one will win.

This writeup makes the excellent point that the weight of the new tax structure falls heavily not only on the high-population coastal states but also on the younger demographic within those states.

It falls heavily on the demographic that supported Trump the least.

Most young people don't make enough to pay a lot in state income taxes, don't own a house so they don't pay mortgage interest, don't have a professional job that has all sorts of tax-free benefits, don't have kids and aren't married so they can't use many personal exemptions, etc. The tax bill cuts corporate taxes while raising taxes on middle/upper middle class people. That's consistent with taxes in Germany, Canada, the U.K., etc.

The mortgage interest thing does impact young people though. While they can't buy houses now, once they do have the financial ability to do so it'll cost them more than it cost their parents to buy a house.

No, it will cost them less, because the value of the mortgage interest deduction is baked into the price of the house. It'll also be more fair. The perverse thing about the mortgage interest deduction is that it benefits you more the more money you make.

I'm a little confused about this. I can understand this in terms of college (i.e., no one pays the sticker price so the prices are elevated, etc.).

But for housing, especially in very competitive markets, I feel that things will prove different. Already, successful house purchases come in above the offering price (from what I've seen) in the Bay Area. Do you think the loss of mortgage interest deduction will lead sellers to decrease their asking prices?

Reduction in demand should lower prices, yes. Either that, or fewer sales.

The reverse - making mortgages cheaper - would also just raise prices.

So if prices do go down, that means property taxes also goes down. So now legacy homeowners get a double tax cut (i.e. they keep the mortgage deduction, and have a lower property tax bill)?

Old properly owners in CA already have a lower property tax bill since they pay on purchase price, not current market price like WA.

Say my marginal dollar is taxed at 40%, and I buy a house valued at $500,000. That value includes not just the house, but the value of the tax deductions. Over the first 10 years at 4% interest, I pay about $17,500 in mortgage interest, which make the value of the tax deductions about $7,000 per year, or $580 per month. If you get rid of the stream of tax deductions, you're lowering how much the house is worth to any buyer who has labor income and will be financing the house (i.e. almost everyone).

Indeed, for almost all houses (even in the Bay Area), people count on the tax deductions to determine how much house they can buy. If you can afford to pay a net $1,800 per month, for example, you can buy a $500,000 house (with a $2,400 monthly payment) given the roughly $600 per month in tax breaks. If you get rid of the tax deduction, you can no longer afford a $500,000 house, and neither can all the other people who previously had a $1,800/month budget. In the long run, that drives the value of the house down by the amount of the lost tax deduction.

It just raises costs. It’s like an interest rate hike, especially in markets where interest only mortgages are common.

The bigger issue is SALT, which is designed to implode local government.

Or perhaps it will help moderate housing prices and make it easier to purchase a reasonably priced house.

>falls heavily not only on the high-population coastal states but also on the younger demographic within those states

Coincidentally the very people who voted for Hillary.

One other effect to consider is the housing prices after the bill. Expensive areas might see an up to 10% drop in property values, which would be bad for those who recently bought but should be easily weathered by others who have seen an 80%+ appreciation in the last 6 years.

why would they drop?

Because buying property becomes less lucrative and requires more money with no mortgage interest tax deduction. I'm not sure anyone has modeled an accurate demand curve, but in theory this will impact housing prices.

But if you sell, you lose your grandfathered in deduction.. a supply cut that might cancel it demand cut

And in California we still have Prop 13, which effectively locks long-term owners into their existing houses.

It's hard to imagine supply getting any lower than it already is, but yes that is potential offset.

Understandably most people in high-tax states would be upset by this, but I see it a as a positive overall. This will put more pressure on those states to reduce their tax rates, lest they lose the workers.

Ultimately, I don't think that states like California use tax money responsibly, so the lower the tax rate the better. Democrats will have two options, to lower taxes or lose seats.

>Democrats will have two options, to lower taxes or lose seats.

The Republicans in Southern California, New Jersey, and Upstate have two options, to not vote for the reconciled bill in the house or lose their seats and the house majority.

There are Republicans all over California, in fact the only blue districts are the major population centers.

I anticipate they will vote with the party, as in either case once the Tax Bill passes their blue constituents won't be happy.

Inaccurate. Orange county voted for Hillary by nearly 9 points while people like Darrel Issa barely hung on. Same for people that hung on in the Bluer parts of Colorado and NoVa like Mike Coffman and Barbara Comstock.

The reckoning is coming in 2018.

Why? California, New York etc are net donor states that contribute tens of billions more to the federal government than they get back, while other states like Alabama get $2 for every dollar contributed. SALT was part of tax code since the introduction of federal income tax in 1913.

For all the right wing complaining about welfare and redistribution of wealth, and states rights, they're more than happy to accept it when they take blue state dollars.

I'm pretty upset at this because despite the relatively high rates of state and local taxes in New York, i have no qualms paying them. Services such as the Department of Environmental Conservation, social services, state parks, education, arts and culturals are effective and well funded compared to most states. I don't think we should be punished for this.

I'd like a citation on your first statement. All things considered, I don't believe either state is contributing more than they get back.

If you like to contribute to those services, you are more than welcome to, but they should not be mandatory contributions. My own view is the smaller the government, the better. Federal and State governments have their place, but it should be up to citizens to decide what matters to them.

http://www.rockinst.org/pdf/government_finance/2017-09-28_Ba...

It's been analyzed by many groups, multiple times. New York contributes more than it recieves.

The Rockefeller Institute of Government report linked above estimated a deficit of 47 billion dollars in FY 2017 alone.

It should come as no surprise considering these states are home to the some of the most successful economic regions in the country.

Your second point doesn't jive with support of this tax plan. It's forcing a tax hike on productive populated blue states to pay more to the federal government which are less represented in how it's spent compared to rural states. I'd love more state and local control, the last thing I want my taxes going to is more GOP funded military pork.

And it's a race to the bottom. If you aren't rich, eat shit.

For those that complain that high tax rates are holding CA and NY back - how do you explain all of the growth and innovation from these states for decades?

SALT deduction is a regressive deduction that benefits the wealthy much more.

I get the frustration of the author on grandfathering in mortgages for interest deduction, and you could certainly argue it’s for the benefit of boomers at the expense of millennials, but isn’t it the only sane option? Otherwise the tax bill could effectively be putting people with existing mortgages (not an easy thing to get out of) in a serious bind. It kind of seems a bit unfair.

Though I will admit after writing that out, that it’s probably not really that different than other taxes - if you plan your financial life around a certain tax situation you have to understand it could always change.

The overall lower tax rates are the biggest hand out to the boomers. They’re the ones with retirement accounts that only now begin to draw down at the lower overall rates.

Boomers may feel some pain though when Medicare and social security are cut next. All signs point to the GOP suddenly crying about the deficit now.

Were very much due for a bubble burst anyway. I think tax cuts for the rich will only drive into the frenzy.

Right, so then the austerity kicks in. On some level the GOP knows this.

It’s fine to say that people shouldn’t plan around tax situations, but that tax break has been thought to be untouchable for a long time now. I’m a millennial who bought last year so for me, this doesn’t sound very fair. Boomers got to take advantage of favorable tax write offs on their homes for decades; I’ll be able to get in on that for 2 years. 2.

I thought if you have a mortgage then you are grandfathered in, no?

you are, but the removal of the state & local income tax deduction means only a small % of people will ever claim mortgage deductions compared to today. You’d need over 24K in mortgage interest + property taxes.

The mortgage interest deduction is bad. Economists are almost universal in their agreement on this topic. Sure it sucks that some people got to take advantage of a bad thing in the past, but that isn't a good argument for keeping it around just for the sake of generational fairness.

That’s just one facet, I don’t think that’s the only reason to keep it around. I think it’s irresponsible economics to encourage an economic behavior and then to uproot it abruptly. I think the knock on effects on the housing market and rental markets haven’t been appropriately priced in. I think there’s a lot of ways for this to go sideways and the payoff isn’t that great.

Couple that to the estate tax changes which are not an economic driver and help to curb wealth inequalities and I think it’s a raw deal.

If you have significantly more than $500k in mortgage interest you are either rich or choosing to live in a top-10 realestate market.

You don’t have to live in a top 10 real estate market because losing the SALT deduction neuters the mortgage interest deduction.

>this is most likely going to be a significant raise in your tax bill.

SALT changes will cause a 1-1.5% percent decrease in after tax income for those making 150k-250k per year, the magnitude increase on taxes is not especially significant.

https://www.vox.com/policy-and-politics/2017/10/30/16557554/...

That really really sucks because state taxes in coastal cities are already extremely high relative to the rest of the nation and $100-200k earners in these cities aren’t rich

> How will the new 2018 tax plan help/hurt you?

Just want to point out that this question is not quite the same as, "How will the new 2018 tax plan affect the amount of tax you are required to pay?"

Even if the tax plan positively or negatively affects the tax you are required to pay, you will probably be helped or hurt significantly more by its affect on your community than you will by its affect on your own taxes.

Agreed. Largely I am protected from the worst impacts of the 2018 tax plan, but I'm not an island - the tax plan does my community no favors.

It not only favors the wealthy over those who really could benefit from tax relief, but it steals from the future by increasing the national debt to pay for it (I have no problem increasing the national debt for services and infrastructure, but giving the wealthy tax relief is neither). What a catastrophe.

Assuming your paycheck is unaffected by the changes? If you live in a low/no state income tax area, your after tax income will go up. If you live in a higher state income tax area, your after tax income will go down.

Your paycheck may get a little bigger because positive macroeconomic effects are expected. The Joint Committee on Taxation expects GDP to go up 0.8%, capital available for production to raise about 1.1% and employment to go up 0.6%. It's unclear how that will affect a single worker.

If you have money in the stock market, you'll probably get more money. The lower corporate income tax probably means that dividends and stock buy-backs will grow, which is also good for many tech workers. So that may help you.

If your employer makes a profit, their profit after taxes will go up. That would help you if you have a profit sharing or stock compensation deal.

The end of the individual mandate means you'll live in a country where many fewer people will have health insurance, which will mean you're living around sicker people. That will almost certainly hurt you, even if those people aren't your friends and family.

> The end of the individual mandate

That's not true, ACA is still in force and everybody will continue to have access to insurance, no rejection for preexisting conditions, people can still be under their parents' health insurance well into their 20s, etc. The only change is now you won't get shaken down when you file your taxes for not having health insurance, which to me is a great thing, especially for members of a site like Startup^H^H^H^H^H^H^H Hacker News.

The congressional budget office predicts the end of the individual mandate will lead to 13 million fewer people insured by 2025.

That's still better than punishing people for not shelling out to private health insurance companies. If the goal is to give everybody access, we need single payer, the current state of affairs is corrupt to the core.

I don’t follow your logic. You want universal healthcare via a single payer solution (a political fantasy in the US for the foreseeable future) but until then you would prefer that millions more go without basic healthcare and that those who do buy it pay more for it?

"Your paycheck may get a little bigger because positive macroeconomic effects are expected."

Really? Tell that to my boss. Please.

But in all reality, this is one thing that will certainly NOT happen for most people out there.

I tried to make it clear that this isn’t guaranteed, but there is good evidence that GDP will go up, and high earners (as OP asked, people making $250k/year, which is 98th percentile) often see wage growth under those conditions. Low and middle earners often not so much.

It still baffles me how many poor Republicans support this just coz they hate Dems.

Boom the economy by adding more debt, cutting social services and screwing the working class. Great plan guys.

The rich will store offshore as usual. It's gonna be a great shit show when the bubble bursts. I can't wait for it.

It's baffling until you consider the effect of culture wars, or 'wedge issues.'

Economics is complex, I mean look at this thread alone on HN (and we're well above the average in education and intelligence). Abortion, religion, and other controversial topics, however, are far simpler to understand. The Republicans know how to get votes through that mechanism of holding tight to certain ideological components of their traditional voter base.

Another large part of the base are 'small government' types, less interested in economic problems and more interested in individual freedom.

I think that's a rough answer to your bafflement.

It depends if you're in a state with high state taxes, for one. You can't deduct those.

In those same states many mortgages are over 500k, as that's the price of a studio apartment in cities, where many engineers live, and most of us don't live in studios.

A good question is, will independent contractors flourish?

>"A good question is, will independent contractors flourish?"

Can you elaborate on this? How would the proposed tax regime be more attractive to contracting?

Pass through and corporate rates are going to drop dramatically. Independent contractors can set up their income as business profit and pay much smaller amount of taxes at higher levels of income.

Will this be retroactive through 2017?

For me it might be a wash. My state and local taxes (state and city tax) are almost 10% combined, and that's no longer deductible. My > 500k mortgage had a big interest deduction yearly, which won't exist.

But I'm paid through a pass-through LLC, which will have a big savings. And it's no longer incentivizing to be an owner-occupier due to the mortgage interest deduction disappearance plus the cap gains exclusion (first 250,000 / 500,000 if married exclusion on sales profit of a property if you've lived in it 2 years, moving up to I believe 5).

It's crazy. It's like the financial incentives are geared towards rentier classes (since I might as well rent my place out and perhaps even put it in its own LLC), self-employed temps, and away from people with student debt, medical expenses, mortgage debt, etc. etc.

No this will apply to the 2018 tax year so 2017 is going to be under the existing tax structure. Thank god, because otherwise mass craziness would have broken out from people setting up withholdings under a false tax structure.

I agree with this being geared towards rentier class but those markets are also likely to see upset in pricing due to loss of tax savings. So at the end of the day we might all be at a loss — except for people who make out on the estate tax and corp tax rate drops. Aka rich people and corporations.

If we take the extreme example of Kansas, which eliminated income tax on pass through entities, we'll see wealthy households structure their income through these entities as part of their tax planning. This did not grow the economy as expected and absolutely cratered the Kansas State budget and the ability for the state to provide services.

Kansas undid these tax cuts this year.

https://taxfoundation.org/kansas-pass-through-carve-out-nati...

I found this online calculator: https://www.marketwatch.com/story/the-new-trump-tax-calculat...

My income is in the range you're asking about, and it says my taxes will fall slightly in the short run, on the assumption that I stop itemizing deductions. I live in Silicon Valley.

Despite that, I am opposed to the bill. I think it's astounding that after all the discussions the world has been having about inequality over the last few years, the Republicans enact a tax plan that is designed to enrich the .1% even more, and balloon the deficit in the process. They are trying to take this country back to 1890.

It's pretty clear that the long-range goal of Republicans in Congress is to reduce or eliminate the New Deal entitlement programs. Greatly increasing the federal deficit is simply a means to this end. This was exactly Ronald Reagan's strategy. Nothing has changed in 35 years.

Yes, I agree.

But these people are smart; they must know that the U.S. will look more like Brazil than Norway in the next decades. How can they sleep at night? Part of my thinks there's a cynical dystopic nervousness in the back of their minds: get in, get profit fast, and get out. This very sentiment I see in startup world in tech, personally observing the effect of VC money and board pressure on startups in my last two gigs. There's just something short-term-minded about investors and politicians these days. The days of FDR-minded folks seems long-gone.

Perhaps it's not the biggest factor, but it is likely to reduce employee benefits like education stipends, relocation stipends and dependent care FSAs.

Previously, employers were able to deduct the costs of these benefits from their tax bill, saving them money. The new tax plan eliminates these benefits (https://www.shrm.org/resourcesandtools/hr-topics/benefits/pa...).

Now that these benefits are much more expensive, you can except these benefits to reduced or eliminated, and the remaining costs to be take from your future salary.

Yes, but those benefits should be paid for in a lower overall corporate tax rate. There's many flaws in the tax bill, but eliminating special interest tax deductions in favor of lower taxes for everyone who isn't a special interest isn't one of them. Unfortunately the tax bill includes many new special deductions for special interests like craft breweries, and people passing on multi-million dollar estates to their children.

Corporations are enjoying record profits for years but wages have been stagnant since the 90s. The idea that when corporations receive more money they pass on a proportional value of benefits to their employees or customers is a laughable fiction. In fact, they will proudly say that this is a good thing, as their only responsibility is to the shareholder.

https://youtu.be/_6Dvv1uSmss

It's a sick joke

An alternative view is that those people will no longer receive tax free benefits that the rest of us aren't getting.

I'm hoping they take things a step further and one day eliminate the health insurance deduction for corporations and count the cost as income for the employee. It's nonsense that a corporation can deduct it as an expense but an individual getting their own insurance can't. Sure you can set up a pass through entity but why should you have to?

I understand and agree with the sentiment, but not the conclusion. What happens when they can no longer deduct it, won't employees' health plans become even worse?

I wonder about the loopholes this creates.

Will this transfer residential real estate ownership from individuals to corporations?

Eg, since buying a home becomes even more expensive in the bay area because of property tax and mortgage deduction limitations.

But now, corporations (who have more cash from corp tax reduction, and more leeway with deductions) start purchasing real estate and then offering to rent it to employees as a perk.

Has the additional benefit for corporations, of keeping employees from leaving (since leaving the job means losing your housing)

Aligns well with the GOP goal of taking us back to fuedalism

Tax is complicated, however:

1. Fewer tax brackets. Many software engineers are in the 28% and 33% brackets. A lot of these people will now be in the 35% bracket, depending on their exact income.

2. Standard deduction has been increased. More money in their pocket (though this is true with many)

3. Mortgage interest deduction -- this might be removed to only 500k. This means people in california won't be able to deduct as much for their expensive houses.

There are many more things, obviously.

The standard deduction is being increased but personal exemptions eliminated so that’s basically a wash. Child tax credit increase is also offset by eliminating exemptions.

These are a good summary, but for #1, I was under the impression that the Senate bill keeps 7 brackets. Whether that will survive conference is another matter, but from what I know, the conference version will more likely resemble the senate’s version of the bill.

Anyone with substantial state taxes and mortgage interest is unlikely to take the standard deduction currently, and the increase in the standard deduction seems unlikely to compensate nearly enough. Couple with the significant impact on education cost (especially graduate education) and this tax plan looks tailor made too punish the coasts and benefit the aristocracy.

Indeed people living in NY and CA are going to feel pain without the ability to deduct states taxes. People are in for a shock.

Its worth noting that 2 and 3 are mutually exclusive. You can claim one or the other.

For starters, stop calling it a "tax cut" plan.

The main question - What all these cash rich companies and individuals will spent they new money on?

World is already awash of capital, and we have everything bubble now.

I bet next move by this administration will be drastic rate increases! This will mean they can starve everybody else from cash, and then swoop in and buy on the cheap.

Maybe it's time for us to all start companies that cater to the rich. Get the crumbs wherever we can. /s

Microsoft Google and Apple have so much cash, they don't know what to do. Simplest is to put it offshore where gains incur the lowest taxes.

Two things that stand out to me: Now you can quit your job and do whatever without getting robbed by absurdly expensive plans through ACA or shaken down when you file taxes. That's a big deal for people who want to take a chance on some startup idea. And filing taxes is simpler since you don't have to prove that you had health insurance. I hated that shit.

What if you get sick on your startup venture and don't have a lot of income?

Yeah it's gonna be amazing.

You could still choose to be insured, wouldn't have to pay if your income is low, and couldn't be denied for a preexisting condition. My point is that you're not being _coerced_.

Right, because if you get sick without insurance and the hospital has to repair you, that comes out of the public tax system anyway.

The Republican agenda has often been around socializing risk (as in the example above) under the guise of individual freedom.

> And filing taxes is simpler since you don't have to prove that you had health insurance.

All you had to do was tick the "Yes" box. You only had to prove it if you were audited.

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