Market Overview
Tax Reform Takes Immediate Effect
Will working airline pilots benefit from the reforms enumerated in the Tax Cuts and Jobs Act? According to at least one online calculator, it would appear so, but only if they live slightly below their means.
We start with two typical USPFA members, each of whom makes $200,000 per year, contributes the maximum $18,500 per year to their 401(k) plan, and bought all the house they could safely afford – four times their annual pay. They are both halfway through paying a 30-year mortgage at 4.5% APR and are married, filing jointly, with two dependent children and nobody else in the household. For simplicity’s sake, we assume no investment income, no further deductions aside from mortgage interest, only one residence, and that the appraised value of their homes for tax purposes has neither gone up nor gone down. These assumptions suggest $21,972 in annual mortgage interest. Property taxes is based on $800,000 in annual principal multiplied by the locally prevailing rate.
The biggest difference between these two pilots is that one lives in New Jersey, with a 5.31% mortgage tax and an 4.83% combined sales and income tax. The other lives in Oklahoma, with 1.38% and 5.23% respectively.
According to Maxim Lott’s tax plan calculator, the New Jersey resident would pay $24,906 in 2018 taxes, compared to $19,687 in 2017. That would be an $5,218 loss, or 19.5% to the bad.
The Oklahoman would pay the same $24,906 in 2018, but that compares to $27,138 in 2017. That would come to $2,232 or 8.3% to the good.
Given these assumptions, residency in only a handful of states would provide tax relief to USPFA members. That is because of two stipulations:
- The mortgage interest deduction is limited to $750,000, which means $50,000 worth of property in this example would not be eligible.
- The deduction for state and local taxes has a $10,000 cap, so even states with low sales and income taxes would be less attractive to homeowners if they have comparably high property taxes; these include Wyoming, Nebraska, Montana and Texas, which all have property taxes above 3.5% of assessed value.
If we change that constraint, though, the tax reform bill becomes much more appealing. Let us assume that the pilots are both content with $500,000 homes. In that case, the New Jersey homeowner would pay only $1,216 more in federal taxes, and the one in Oklahoma would see a $3,312 benefit.
A Texan pilot with a $500,000 home would see a $1,034 benefit, even though if he were in an $800,000 home he would be $1,717 in the hole.
Of course, this is all estimated. Property tax rates can change from one side of a street to the other. Also, different calculators would yield different results, but after sampling a few, certain themes replay:
- Those drawing an upper middle-class paycheck tend to save money on taxes under the new tax code, providing they do not own all the house they can afford.
- The total tax burden of someone living in a low-tax state and someone living in a high-tax state should converge in 2018.
- This convergence slightly benefits those living in low-tax states.
WalletHub served as the source for state-by-state tax rates and Compass for mortgage calculations.
