The tax reforms which were a key part of the recent election campaign are starting to move forward, and it could spell bad news for California property owners. The headline claim by the politicians is that the average American family would save $1,182 per year, but as with most tax-related matters, the devil is in the detail.
Tax matters are always complicated, and however you split the circle, there will always be winners and losers, and it is the people who reside in California who could be the biggest losers in this drastic round of tax changes.
Some of the proposals included in the 429-page bill include
- Bring to an end the write-offs for state and local income taxes – This will have quite significant implications for residents of California where the current state tax rate is 13.3%. Many Americans currently claim the deduction to write off any state and local taxes against their federal tax bill. The implications could be so significant that it could even encourage or drive people to move their state of residence outside of California.
- Mortgage Interest Rate Deductions limited to new loans of $500,000 (Previously $1Million. Considering that the cost of property in California is amongst the highest in the United States, this would have a disproportionate effect on residents of California further increasing the pain of these tax changes.
- Deductions for second homes would be removed entirely – Many California residents own second properties as vacation homes or in a different state, and so any tax deductions currently available to them would be removed under the new proposals.
- Property tax deductions would have a $10,000 limit placed on them.
These changes are by no means minor, and the president is pushing for them to be passed before Christmas 2017, so the impact could be felt rapidly.
Under the new proposals, there will be four tax brackets, which should in theory at least simplify the tax system. The four rates are as follows
Married Couples Filing Jointly –
0 to 90,000 Tax Rate of 12%
90,000 to 260,000 Tax Rate of 25%
260,000 to 1 Million Tax Rate of 35%
1 Million and above taxed at the current top rate of 39.6%
0 to 45,000 Tax Rate of 12%
45 to 200,000 Tax Rate of 25%
200,000 to 500,000 Tax Rate of 35%
500,000 and above 39.6%
California consistently has the highest volume of would-be tax fugitives, where people try to earn their money in the California before trying to sell their business or property and settling in another state where the state taxes are not as severe. Although not all of these attempts are successful, the new regulations are only likely to exacerbate the situation, with even more people likely to be tempted to avoid the state tax implications.
Interestingly the burden of proof remains with the individual; if you live within the state for a period of 9 months or longer, then you are presumed by the state to be a resident. However, on the other hand, if for instance your job moves you outside of California you have to live outside the state for a period of 18 months before you are no longer considered to be a resident.
The Importance of Hiring A California Tax Expert.
There are a wide variety of ways that even a non-resident of California could fall foul of the rules. Little things such as where your wife or children reside, or where your children attend school could make a difference. Where you are registered to vote, where your vehicles are registered, where your driver’s license is registered can all come back to haunt you.
That is why it is critical to employ the services of a Californian tax expert, who can guide you through the intricacies and pitfalls of the California tax system.
It is important to understand that anyone trying to move outside of California to avoid tax implications needs to follow a strict system. You need to understand that high state taxes such as California can be quite aggressive in ensuring that all of the procedures were properly followed, so if you have not crossed the T’s and dotted the I’s things could come back to haunt you.
The best advice would be to contact a professional tax adviser who has an in-depth and intricate knowledge of the California Tax system, and ensure that everything is in order. Good luck, the times, they are changing!