What tax reform means for Encinitas

One of the most prominent features of the new tax law is the limit on deductibility of state and local taxes (SALT). Because these taxes are primarily state income tax and property tax, areas with high property values in high-tax states will be most affected. Clearly, Encinitas would seem to be ground zero for the effect. Indeed, our Congressman Darrell Issa voted against the bill for this very reason.

The reality, however, is not so black and white. Here's a look at how tax reform might affect the different types of residents in Encinitas.


1) Renters - Winners

From the single surfer / biotech guy renting a studio in Cardiff to the young family renting a home in New Encinitas, pretty much all renters will see significantly lower taxes due to the lower rates and higher child credits and standard deductions. The loss of deductibility of state income tax does not eclipse this except for people with extremely high incomes.


2) Old school Encinitans - Winners

If you bought your house before the early 2000's bubble, your property taxes are protected by Prop 13 and very low, so the deductibility doesn't matter much to you. As for state income tax, most old school Encinitans don't have the mid-six-figure incomes of new arrivals, but even those who do may benefit (see #3 below).


3) Encinitas Ranch working affluent - It depends

Given that the median single-family home sale price is now $1.2 million, many of Encinitas' new homebuyers will fall into this income range.

Decades ago, Congress passed the Alternative Minimum Tax (AMT) to limit deductions for the very rich. Due to the fact that the AMT was not indexed for inflation, it no longer affects just the very rich but millions of upper-middle-income households. The Tax Policy Center reports that 29.1% of the returns in the $200,000 - $500,000 income range pay AMT, but that percentage would be much higher in Encinitas because AMT hits harder in high-tax, high-property-value areas. If you're in AMT, you already can't deduct state and local taxes, so the new tax law's lower brackets are a big win for you. However, if you're a high earner not currently paying AMT, you're likely to pay a few thousand dollars more because of the loss of those deductions.


4) Stretching-to-buy new arrivals - Likely modest losers

If your household income is in the high $100,000's or low $200,000's and you recently bought a house at Encinitas' record-high property values, you're likely to pay several hundred to a couple thousand more in taxes due to the loss of that property tax deduction which is so large relative to your taxable income.


5) Qualcomm / biotech / extreme sports multimillionaires - Losers

If your taxable income is $1 million or above, you're likely beyond the AMT effect and you're paying California's 13.3% millionaries' tax, which is no longer deductible. Even for those somewhat below the $1 million income level, the loss of income tax deductibility will likely vastly outweigh the lower tax brackets, so you're going to be paying a lot more.


The Wall Street Journal has a great tax calculator (subscription may be required) that lets you see what your outcome will be. I'd be interested to hear your experience, whether from the WSJ calculator or your tax adviser.