Huge TAX CUT for the Rich HIDDEN in the New Stimulus Bill – HEROS Act – The Credit Shifu

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Anyway, let’s actually talk about this tax cut. So the story starts in 2017 when the Trump tax plan or the tax cuts and jobs act was passed. In fact that bill was supposed to be called something else…

Anyway the Tax cuts and jobs act, limited the deduction for state and local taxes, or SALT deduction to $10 thousand dollars per year. For the years 2018 to 2025. So what this means is that previously you could deduct 100% of your state income tax or sales tax you paid and 100% of the property taxes you paid against your federal income tax. Thus you wouldn’t pay federal tax on that portion of income. For example I pay about 7000 in property taxes on this house and last year I paid about 5000 in state income taxes to the states of NY and NJ, because I spent time in both. So my SALT deduction would give me an extra $12 thousand dollars that I wouldn’t pay federal income tax on, except that the limit is now $10 thousand dollars, so the maximum deduction i could get is 10 thousand tax free, which would save me around $2200 or so.

Now this is only if you itemize, and the standard deduction was raised too in the Tax Cuts and Jobs act which means that more people just went for the standard deduction and still benefitted. But for high earners or people who own expensive property, in high tax states like New York and California, the tax cuts and jobs act actually turned into a tax increase act. And this drove the uptick in wealthy people leaving those states, Californians moving to Nevada for example. Or a friend of mine who was in the top income tax bracket here in new york, over 8%, moved to Seattle Washington, where there is no state income tax at all.

Let’s give an example of someone earning a million dollars a year in New York city. They would pay about $300,000 in Federal income taxes, but then also pay about $65 thousand to the state and $37 thousand to the city, which totals about 103 thousand dollars. Their marginal tax rate is 37%, so the saving for them if the SALT deduction was unlimited would be about 37 thousand dollars, but it is limited to $10,000, so they only save $3,700. Imagine if it was someone who earned 10 million a year? They would save 370 thousand. Now even though all tax rates were reduced slightly, rich people often still end up worse off in the state of New York. And guys, please remember this figures are just estimate, not a CPA certified exact representation of who much they would save.

Now obviously it is Democrat run states that are losing their wealthy residents because of this policy. Trump probably designed it that way to force those states to reduce their local taxes, but so far they haven’t.

Hey! The Democrats tried to get the deduction back last year through the Restoring Tax Fairness for States and Localities act, sounds so innocent doesn’t it, which as you can see passed the house but went no further.

But they can always have another go right? Yes, and that is exactly what they are doing. Cue the HEROS act, skip to page 224 and you will find a section entitled Elimination for 2020 and 2021 on the Deduction for State and Local Taxes. Normally you have to read the whole section to understand what it is about, but with this the title pretty much sums up the policy change. But it is only for the years 2020 and 2021 right? Well yes. But remember the $10,000 limit on the SALT deduction in the Tax Cuts and Jobs act only lasts to 2025 anyway. So the rich would get two years of tax cuts, then a three year increase but there would be light at the end of the tunnel because in 2026 the $10,000 cap would come off again! Or perhaps they are counting on Joe Biden winning the presidency and making it permanent

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