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CA homeowners: Here's how the GOP tax plan might affect you

The stock market and the economy are booming, yet high-income earners in California paid less tax in June than analysts expected.
Photo by 401(K) 2012 via Flickr Creative Commons
The stock market and the economy are booming, yet high-income earners in California paid less tax in June than analysts expected.

The tax blueprint Republicans rolled out Wednesday calls for doubling the standard deduction and eliminating many smaller write-offs, although the mortgage interest and charitable contribution deductions would remain in place.

It's designed to persuade more American taxpayers to take the standard deduction on their income taxes rather than itemizing their deductions. But in California, where high home prices translate to big mortgage interest write-offs, most homeowners would likely find it more financially advantageous to keep itemizing, and they'd likely pay higher taxes than they do now, said Jason Oh, a tax professor at UCLA's School of Law.

"But just barely. It's a tough decision," he said.

Filing joint, with house, itemize

To explain why, Oh said, imagine a couple earning $100,000 who own a $550,000 home (that's about the median price in Southern California).

Under the current tax code, that couple would forgo the $12,000 standard deduction and instead itemize. They'd take an estimated $20,000 mortgage interest deduction, a $6,000 property tax deduction and an $8,000 exemption ($4,000 per person in the household). In addition, let's say they had $5,000 in charitable contributions.

Altogether, they could write-off $39,000 (that's about the average amount Southern Californians deduct when they itemize, according to a study from the Brookings Institute).

Under the GOP tax plan (and again, all of the details aren't clear yet, but this is what we know so far), that same couple would have a choice of taking a $24,000 standard deduction, or itemizing their mortgage interest ($20,000) and their charitable contributions ($5,000), making for a total of $25,000 in deductions.

In this scenario, itemizing is just barely the better option, and it is far less than the $39,000 deduction they currently can take.

"The family that owns the median home probably is going to face a tax increase," Oh said.

Filing single, no house, standard deduction

The GOP plan is a bit rosier for people who don't own a home. Take a single person who doesn't have much to write off, and therefore takes the standard deduction of $6,300. They also take the $4,000 exemption as the sole member of their household. That's a total of $10,300 in deductions.

Under the GOP plan, this individual would get a $12,600 deduction instead. 

But Oh notes that the GOP plan would also raise taxes on people in the lowest earnings category. So people currently in the 10 percent tax bracket would edge into the 12 percent bracket, which would offset the taxes saved from that higher standard deduction.

What about the property tax and state sales tax deductions?

It wasn't mentioned in the plan, but tax policy experts say it's likely these are among the deductions that the GOP wants to eliminate. That's one of the reasons Democrats in Congress oppose the plan.

Oh cautioned that the GOP plan is in its earliest stages. No one is certain if other deductions (beyond the mortgage interest and charity deductions) are being considered. The plan is likely to take on many different versions before – and if – it comes up for a vote in Congress. 

"Historically, a lot of [tax] proposals have come out, and rarely does the final product look like the original," he said.