House Plan Keeps 401(k) Contributions Tax-Free

But it limits home mortgage interest deduction and kills write-off for state and local income taxes

by Brendan Kirby | Updated 02 Nov 2017 at 9:01 PM

The tax bill released Thursday keeps 401(k) accounts intact, eliminates the deduction for state and local income taxes, and caps the home mortgage interest deduction at home values up to $500,000.

Republicans bowed to a marker laid down last month by President Donald Trump and opted not to touch 401(k) accounts, which allow people to save and invest money for retirement tax-free. They also backed away from their original proposal to eliminate the deduction of all state and local taxes on federal tax returns.

Under the Tax Cuts and Jobs Act, people would still be able to write off property taxes, but only up to $10,000, but they would lose the ability to deduct state and local income taxes. In addition, the bill caps the home mortgage interest deduction at home values up to $500,000, down from $1 million, and eliminates the ability to take the deduction on vacation homes.

Stephen Moore, an economist who advised President Donald Trump on tax policy during last year's presidential campaign, told LifeZette that the plan falls short of ideal on removing loopholes. As a result, he said, the bill more closely resembles Ronald Reagan's 1981 tax cut than his 1986 reform.

"We just didn't get the big reforms that we had hoped for," he said. "I wasn't all that hopeful that we would get it, anyway. This is tax cut bill, not a tax reform bill."

The state and local tax deduction has been a point of contention. Critics contend that it effectively forces taxpayers across the country to subsidize profligate spending in a handful of states with high taxes. But a number of Republicans from those states — chiefly New York and New Jersey — have pushed back hard against eliminating the break.

It is unclear whether those holdout lawmakers will be won over by the compromise. Rep. Dan Donovan (R-N.Y.) told reporters on Thursday that he needs to analyze the numbers.

"I just don't know yet, because we don't have the details," he said.

Rep. Peter King (R-N.Y) expressed the same sentiment to The Hill: "I'm still analyzing it, but right now, I'm strongly leaning no."

Marc Goldwein, senior vice president and senior policy director at the Committee for a Responsible Federal Budget, said he favored eliminating the state and local tax deduction in its entirety. But he said the compromise rolls it back substantially.

"That's still pretty significant," he said.

All of the reductions the bill makes to tax breaks total between $1.2 trillion and $1.3 trillion over a decade, Goldwein said.

GOP leaders decided to make no changes to the popular 401(k) breaks.

"We've done our work to make sure that middle-income Americans continue to get that break and continue to have that break," Rep. Jim Renacci (R-Ohio) told CNN just before House leaders unveiled the plan.

Moore said it is hard to make wholesale reform because it draw intense opposition from the "swamp" in Washington.

"It was just too heavy a lift," he said.

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  3. state-and-local-tax-deduction
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  5. tax-cuts-and-jobs-act
  6. tax-reform
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