Some Republicans believe that extending the current $9,150 tax deduction cap on mortgage interest on tax-favored savings accounts could appeal to “working people” — by extending it, they said, to the family where one spouse is younger than 25, earning up to $85,000 and rents an apartment.
Democrats think the “snowplow” should be extended, as it was for the first time this year, to the self-employed, where a married couple making $150,000 to $200,000 annually could save about $10,000 on their mortgage interest. For taxpayers earning over $300,000 a year, that deduction could increase savings from up to $8,900 to $10,600.
It’s not as much as the Bush tax cuts or the Obama tax increases on top earners or investment income, but a gift Democrats can use to differentiate between the tax plans under consideration this year.
“We need to make the decisions that help hardworking middle-class families to keep more of their hard-earned money,” said Sen. Ron Wyden, D-Ore., a supporter of the deduction, in an emailed statement. “Unfortunately, the GOP’s plan for estate and tax breaks for the well-off is class warfare against the middle class.”
The current deduction is an effective incentive for Americans to save by saving the interest they receive on mortgage payments. The benefits of the deduction are, in part, a result of the connection between the tax deduction and the tax rates the working family pays on mortgage interest payments.
That process –- how federal tax rates affect how much interest taxpayers can deduct from their tax returns –- can turn out to be more complicated for the wealthy than for families with lower earnings, said Robert E. Kleinhenz, chief economist for the Los Angeles County Economic Development Corp.
“High-income earners — that’s where the deductions are,” he said. “If it were for everyone else it would be pretty easy.”
Middle-income taxpayers are very likely to pay slightly higher taxes, said Kleinhenz, as part of efforts to balance the federal government budget.
Some conservative economists have criticized the SALT deduction as a counterproductive tax break. A GOP tax plan called The American Opportunity Tax Credit would give out $4,000 on the first $500,000 worth of earnings and save a worker earning $40,000 more than the average college graduate from the 1990s, a release from Ways and Means Committee Chairman Kevin Brady, R-Texas, says.
Nonetheless, many Republicans have backed the idea of allowing taxpayers to deduct mortgage interest for their home-ownership savings accounts, which are not subject to income taxes. And, according to a conservative advocacy group, the Trump administration has been working behind the scenes with lawmakers to help the GOP achieve that goal.
“If the proposal to open up the SALT deduction were passed and implemented, it would help make up for the empty contributions from people not making significant contributions to their retirement plans,” said Taylor Turner, a spokesman for the group, Americans for Prosperity.
But Democrats are not set to support the GOP plan.
So far, Democrats have focused their public criticism on Republican efforts to offset tax cuts to the wealthy with legislation that would end the repeal of the Obamacare individual mandate, which requires most Americans to buy health insurance. Those who do not buy an insurance plan would pay a fee — expected to cost the government $314 billion over 10 years — which it would offset by eliminating the deduction for medical expenses above a level ($10,000 for singles and $20,000 for married couples).
Some Democrats are backing a $5,000 credit for people who do not buy insurance because of the individual mandate, also known as the individual mandate. Others, such as Sen. Cory Booker, D-N.J., support a Medicare-style single-payer health care program instead.
Democrats say they want the bulk of their energy spent fighting against those individual provisions, but that they will still seek to help lower-income Americans make the case that the Republican tax plan is a benefit for the wealthy.
“We want the thing to be understood and people to understand the advantage of giving money back,” Booker said.
Read the original article on Bloomberg. Copyright 2017. Follow Bloomberg on Twitter.