The
threat of higher taxes
has been around for years. But earlier this week, the chances of
some major disruptions for some taxpayers got a whole lot bigger,
as it became clear that several popular deductions are potential
targets for raising revenue in post-election federal budgets.
Republican Presidential candidate Mitt Romney gave some
details on his plans for a budget proposal should he be elected
in November. Although his calls for lower tax rates across the
board run counter to Democratic calls to let current rates rise
back to decade-ago levels for upper-income taxpayers, a couple of
things he proposed actually suggest at least a little bit of
common ground. But they could spell problems for taxpayers who
take advantage of the provisions he's proposing to cut -- as well
as the businesses that thrive on those provisions.
Romney's call to
end the mortgage interest deduction
for second homes doesn't go as far as some analysts believe is
appropriate, but it's a step toward removing one of the largest
subsidies in the tax code. By getting rid of some of the
incentives of owning homes, the U.S. might help avoid a future
repeat of the housing bubble and the financial devastation that
followed.
Housing-related tax provisions abound and are highly favorable
to homeowners. Deducting mortgage interest and real estate taxes
are just two of the benefits. Joint-filing homeowners can also
exclude as much as
$500,000 in capital gains
when they sell their homes -- avoiding tax
entirely
on that amount. That's a far better tax break than investors get
on stocks, bonds, and other investments.
Of course, getting rid of mortgage interest deductions doesn't
do the industries that rely on them any favors. Homebuilders
Hovnanian
(
HOV
) and
PulteGroup
(
PHM
) build homes in areas that are popular destinations for
second-home buyers, and thus taking away the tax incentive to
borrow to purchase second homes could have a direct adverse
impact on their demand. Similarly, as
Bank of America
(
BAC
) and
Wells Fargo
(
WFC
) try to boost the credit quality on their loans and demonstrate
that they're actually lending the cheap money that the Federal
Reserve provides, taking away at least one source of fairly
creditworthy borrowers won't help them meet their goals.
The other tax proposal Romney made was to eliminate the
deduction for state taxes for high-income taxpayers. That has the
potential to be far more divisive, as it hurts taxpayers in
high-tax states while leaving untouched those who live in states
with low or no taxes.
However, one thing that a lot of people don't realize is that
for many, the benefits of state taxes
already
get eliminated under the current tax code. That's because the
alternative minimum tax, which hits millions of taxpayers each
year, forces you to reverse itemized deductions on state income
and property taxes you pay, making them worthless.
Losing that tax benefit would likely hurt not only individuals
who live in those states but also the businesses that rely on
hiring skilled workers. Already, no-tax states like Texas and
Washington have a huge advantage over high-tax states like
California, which partially explains the migration of tech
companies toward lower-tax environments over the years. With
Apple
's(Nasdaq: AAPL) provision for state income taxes eclipsing the
$550 million mark in fiscal 2011, there's clearly incentive for
companies to make tax-saving moves. Further tilting the scales to
hurt high-tax states could have significant competitive effects
on the industries that produce high-paying jobs -- exactly the
ones that states are courting more than ever.
In an election year, it's highly unlikely that lawmakers will
make much progress even on tax proposals that gain bipartisan
support, let alone more contentious issues. But as you consider
what moves to make with your finances, be sure to think about how
taxes might affect you. If you don't, you could end up making
ill-advised decisions that will cost you money.
Taxes are a key part of your overall financial plan, but you
also have to have the right investments. Take a close look at The
Motley Fool's special report on long-term investing, which
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Tune in every Monday and Wednesday for Dan's columns on
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.
Fool contributor Dan Caplinger would love to see a simpler
tax code. He doesn't own shares of the companies mentioned in
this article. The Motley Fool owns shares of Bank of America,
Apple, and Wells Fargo, and has created a covered strangle
position in Wells Fargo. Motley Fool newsletter services have
recommended buying shares of Wells Fargo and Apple, as well as
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