Working Homeowners Will Benefit
Millions of working homeowners in California will enjoy a reduction in state and local taxes under this reform. Here are three representative examples:
Household #1:
The first household is a family living in northern San Diego County consisting of two married adults in their mid-30s and two young children. The two adults are both employed, one as a school teacher and the other as a school counselor. Their combined annual income from employment is $154,000.
They have a first trust deed of $454,200 on their home and also owe $43,500 on a home equity line of credit. Their combined balance in checking / savings is $500 while they owe approximately $21,000 on a car loan and in consumer debt. Their house is currently worth $405,000.
This family will save $4,000 a year in taxes under the proposed reform. Details as follows:
Current property taxes: This family’s house has declined in value since they purchased it, but the house was recently reassessed at its lower current market value. Including local bond assessments, the current property taxes are approximately $4,800 a year.
State Income Taxes: With $32,000 in deductions (largely mortgage interest), this household’s taxable income is $122,000. Per the California Franchise Tax Board’s website, in 2009 a couple filing jointly will owe $4,313 in state personal income tax on the first $92,698 of their income and 9.55% on their income in excess of that figure. Thus, this couple’s state income tax liability for 2009 is $7,111 less $392 in exemption credits, or $6,719.
Sales Tax: While most people do not keep track of the amount of sales tax they pay, the IRS website has a state sales tax calculator which allows taxpayers to compute the amount of sales tax which they may claim as a deduction on their federal tax return. The three variables in making this calculation are (1) place of residence (2) income range and (3) number of personal exemptions.
The IRS calculator is useful in estimating the amount of sales tax paid by various households. The latest year for which this calculation can be made is 2008. However, on January 1, 2009, California increased its sales tax rate by 13%, from 7.75% to 8.75%.
Plugging in this information for the subject family, the estimated sales tax paid by this family is $1,675 before adjusting for the 13% increase in sales tax in 2009, and without adding any sales tax for specific items such as the purchase of a vehicle or other big-ticket item. Adjusting for the 2009 increase in sales tax, this family’s estimated sales tax liability for 2009 is $1,890.
Accordingly , total property tax, state income tax and sales tax paid by Household #1 in 2009 was $13,409.
Tax on rental value of the household’s land: The monthly rental value of this family’s home is $2,250. This is a price-rent ratio of 15 to 1. The fraction of land value to total value for this family’s home located in northern San Diego County far from the urban center is 45%. Thus, the monthly rental value of the land is $1,012.50.
At a 75% tax rate, the monthly land tax for this family will be $759 and the family’s annual land tax will be $9,108. This is a tax savings of over $4,000 a year compared to this family’s present state and local tax burden.
Household #2:
The second household consists of a single adult with a high-school aged child living in Sacramento County. The adult earns $72,000 a year. This family owns a house worth $162,000 and the fraction of land value to total value for their home is 40%.
Household #2 will save over $1,100 a year in taxes with the tax reform. Details as follows:
Current property taxes: Current property taxes on the family’s home are $1,600 a year.
State income tax: The single adult taxpayer has $15,000 in deductions, so taxable income is $57,000. The tax due is $3,173 less exemptions of $196, or $2,977.
Sales tax: Estimated sales tax paid in 2009 was $1,085 (computed using IRS sales tax deduction calculator for 2008 with adjustment for 2009 sales tax increase).
Thus, the total property tax, state income tax and sales tax paid by Household #2 in 2009 was $5,662.
Tax on rental value of household’s land: The rental value of this family’s house is $1,250 a month exclusive of water, sewer and trash pick-up charges. Since the percentage of land value of this property is 40%, the monthly rental value of the family’s land parcel is $500 a month or $6,000 a year.
At the 75% tax rate, the monthly tax on the land’s rental value will be $375 and the family’s annual land tax will be $4,500. This is a tax savings of over $1,100 a year compared to this family’s present state and local tax burden.
Discuss this on the official Prosper California Facebook Page
