Congress Toying with the SALT Deduction Limitation

Article Highlights:

118th Congress
SALT Deduction Limitations
Deduction Background
States Most Affected
Pending Legislation
Who Benefits from a Change
Tax Foundation Statistics

There is movement in the 118th (2023-2024) U.S. Congress, primarily the House of Representatives, which has three bills before it that would liberalize the current itemized deduction limitation on state and local taxes, referred to as the SALT limitation, which is currently $10,000.

The SALT deduction limitation places a cap on the amount of state and local taxes (SALT) that taxpayers who itemize their deductions can deduct from their federal taxable income. This limitation was created by the Tax Cuts and Jobs Act (TCJA), which was signed into law by President Trump in December 2017. This provision started with tax year 2018 and is scheduled to expire after 2025.

Prior to passage of this law, taxpayers could deduct the full amount of their state and local property taxes, as well as either their state and local income taxes or sales taxes. However, the Tax Cuts and Jobs Act introduced a deduction cap of $10,000 per year for the total amount of these taxes. This means that taxpayers who pay more than $10,000 in combined state and local taxes can only deduct a portion of these taxes from their federal taxable income.

As an example, let's say you are a homeowner in a high-tax state like New York. In a given year, you pay $16,000 in state income tax and $10,000 in local property taxes. This totals $26,000 in state and local taxes. So, even though you paid $26,000 in state and local taxes, you can only deduct $10,000 from your federal taxable income. Thus, you end up losing $16,000 of your state and local tax itemized deductions, and if you are in the 24% tax bracket that would end up costing you federal income tax of $3,840.

The states most affected by the SALT limitation are generally those with high state and local tax rates. These tend to be wealthier, more populated states. According to the Tax Foundation and other tax policy experts, the states most affected include:

New York: New York has high state income taxes and property taxes, especially in the New York City area.
New Jersey: New Jersey has some of the highest property taxes in the country.
California: California has high state income taxes, particularly for high earners.
Connecticut: Connecticut has high property taxes and also levies a state income tax.
Illinois: Illinois has high property taxes and a state income tax.
Maryland: Maryland has both state and county income taxes, as well as high property taxes in some areas.

Residents in these states are more likely to have state and local tax bills that exceed the $10,000 SALT deduction cap, meaning they face higher federal tax bills under the SALT limit.

Some states have even developed convoluted work-arounds which tend to benefit the more affluent taxpayers.

This law will expire in 2026, and has been controversial from the beginning, and now three bills are pending in the 118th (2023-2024) Congress that would liberalize the limitation.

There is a bipartisan SALT Caucus in the House that is responsible for H.R. 160, the SALT Fairness Act of 2023 which would totally repeal the $10,000 cap imposed by TCJA. Another bipartisan bill titled the Tax Relief for Middle Class Families Act of 2023 (H.R. 680) would increase the limitation to $200,000 for married couples and $100,000 for others. Yet another bill, H.R. 339, SALT Marriage Penalty Elimination Act would increase the current cap of $10,000 to $20,000 for a married couple filing a joint tax return. A similar bill was introduced in the Senate but has not progressed.

It is interesting to note all the sponsors of the legislation are from states with high state and local tax rates.

In addition, tax deductions are for people who itemize deductions rather than taking the standard deduction. For 2023 the standard deduction for unmarried taxpayers is $13,850, for heads of household filers $20,800 and for married taxpayers filing jointly $27,700. Thus, only those who itemize their deductions will benefit from any law change, and those are generally the wealthier taxpayers.

The Tax Foundation provides statistics about areas with the highest state and local taxes and where any liberalization of the SALT limit would be the most beneficial. It also should be noted that the most conservative members of the House probably would not vote for a total repeal of the SALT limit.

Any of the proposed bills would benefit the richest fifth of taxpayers in 2024 while having virtually no effect on any other income group.

So, it is quite possible there will be a change, but the question is how big of a change?

Congress Toying with the SALT Deduction Limitation

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