Question

A) Maria is single with no dependents and has an annual salary of $125,000. She is considering the purchase of a $400,000 house. While she was house-hunting, the 2017 tax act passed, changing the deductions and tax brackets and limiting the deduction for state and local taxes (SALT) to $10,000. Prior to 2018, the standard deduction for a single person was $6,350 and a person exemption of $4,050. A portion of the taxable income-brackets was:

Over	But Not Over	Percentage
0	9,325	10
9,325	37,950	15
37,950	91,900	25
91,900	195,450	28

In her state, state income taxes are a flat 5% of all her salary income (NO deductions or exemptions) and property taxes are 2% per year of the value of her house. Assume that IF Maria decides to itemize her deductions, that she has no deductions beyond her state income and local property taxes and her interest on her home loan (mortgage interest). Finally, assume that if she decides to buy the house, she will pay $15,000 in mortgage interest in the first year. Prior to tax reform, under 2017 tax rules, how much would Maria have saved (the difference between Maria's taxes w and w/o the house) in taxes in the first year by purchasing the house?

B) Beginning in 2018, the standard deduction for a single person was $12,000 and no exemption. A portion of the taxable income-brackets was:

Over	But Not Over	Percentage
0	9,525	10
9,525	38,700	12
38,700	82,500	22
82,500	195,000	24

In her state, state income taxes are a flat 5% of all her salary income (NO deductions or exemptions) and property taxes are 2% per year of the value of her house. Assume that IF Maria decides to itemize her deductions, that she has no deductions beyond her state income and local property taxes and her interest on her home loan (mortgage interest). Finally, assume that if she decides to buy the house, she will pay $15,000 in mortgage interest in the first year. Under the 2018 new tax rules, how much would Maria have saved (the difference between Maria's taxes w and w/o the house) in taxes in the first year by purchasing the house?

c) If most people in Maria's neighborhood have similar incomes and similar tax situations and using your answers from the previous 2 questions, do you expect house prices in her neighborhood will go up or down as a result of the 2018 tax bill? Give a 1 sentence explanation

Answer 1

A) First we have to compute the taxable income and tax liablity of Maria for the year 2017, which are as below:

	Computation of taxable liability of Maria for 2017
	Particulars				Amt
	Salary				$125,000
Deductions:	Itemized deduction				$10,000
	Personal expenses				$4,050
	Mortage interest				$15,000
	Taxable income				$95,950
	Total tax liability				$19582

Tax calculation:

Over	But Not Over	Amt diff	Percentage	tax amount
0	9,325	9,325	10.00%	$932.5
9,325	37,950	28,625	15.00%	$4293.75
37,950	91,900	53,950	25.00%	$13487.5
91,900	195,450	103,550	28.00%	$868
				$19582

Note: 1) I have taken itemized deduction as a priority, due to the fact that the itemized deduction was $10,000 and standard deduction was $6,350. So I have taken the higher amount in this case which is $10,000

2) I have taken personal expenses as they were allowed till 2016 as per IRS act of $4050.

3) Assuming in this case, the house was purchased the mortgage interest was $15,000, which has also been taken by me in the deductions column.

4) Calculation of tax liability is $47708. I have already provided the table for it above. So as the taxable income is $95000, the tax bracket would be in 28% category.

There are two scenarios here, if the house was not bought by Maria in the financial year, then the tax liability would be:

	Computation of taxable liability of Maria for 2017
	Particulars				Amt
	Salary				$125,000
Less:	Itemized deduction				$10,000
	Personal expenses				$4,050
	Taxable income				$110,950
	Total tax liability				$24047.75

$24048. I rounded it up.

if the house was bought by Maria in the financial year, then there would be a deduction of $15,000 of mortgage interest, for which I have already given the calculation in first table.

The difference is $4466($24048-$19582), which is a huge amount.

B) For the second question, the computation is as follows:

	Computation of taxable liability of Maria for 2018
	Particulars				Amt
	Salary				$125,000
Less:	Itemized deduction				$10,000
	Mortage interest				$15,000
	Taxable income				$100,000
	Total tax liability				$    18,290

Over	But Not Over	Amt diff	Percentage	Tax amt
0	9,525	$9,525	10%	$               953
9,525	38,700	$29,175	12%	$           3,501
38,700	82,500	$43,800	22%	$           9,636
82,500	195,000	$112,500	24%	$           4,200
				$         18,290

If in this case, there was not house bought by Maria, then the computation will be as follows:

	Computation of taxable liability of Maria for 2018
	Particulars				Amt
	Salary				$125,000
Less:	Itemized deduction				$10,000
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