February 26, 2019

State and Local Taxes (SALT) cap excludes 10.9M people from prized break

The new tax reform law has some tax filers feeling the sting of a new cap on deducting state and local taxes, known as SALT deductions. The new law limits those deductions to $10,000. The sting is acutely felt for taxpayers living in high-tax states such as California, New York, Maryland and others where the cost of living is so high, their property taxes and state income taxes easily exceed $10,000.

This cap on the SALT deduction was intended to help fund Mr. Trump’s generous tax cuts to corporations and the wealthy. Almost 11 million taxpayers can’t deduct $323 billion in state and local taxes on their 2018 federal tax returns, according a report the Treasury Inspector General for Tax Administration released on February 22, 2019.

The report was released in the middle of tax season and is additional bad news for those who are already seeing lower refunds than expected due to changes in withholding during the 2018 tax year.

As several states are actively seeking ways around the deduction limit, eight governors have formed a coalition to restore the SALT deduction and plan to lobby the new Congress for a change in the new tax law – which President Trump said he is open to talking about. Senate Finance Committee Chairman Charles Grassley, a Republican from Iowa, and other Senate Republicans have already voiced that they will not re-visit the issue.

The news may not be all bad for all 11 million taxpayers stung by the SALT cap. In some cases, the new higher standard deduction may offset the SALT deduction and the larger child tax credit may lower tax brackets. For taxpayers who in the past had their SALT deduction limited due to the alternative minimum tax (AMT), many won’t be paying AMT under the new law.