[2021 Update] Under the Democrat’s proposed $3.5 trillion social infrastructure spending plan there is a strong push by progressive members from high taxing states like New York and New Jersey to remove the $10,000 limit on state and local tax deductions (a.k.a. SALT Cap Repeal).
Spokespeople from Pelosi and other Congressional members pushing this provision have said removing the SALT deduction limit was an important priority in the reconciliation bill, as was a key part of how state and local tax systems were designed in cities with higher property prices.
However there is little doubt that that this tax deduction benefits the affluent (or top 10%) who generally have more expensive properties, which means representatives from lower cost property states like Texas, Arizona and Ohio are not going to support the SALT Cap Repeal.
Republicans, who don’t have much input into the $3.5 trillion bill that is being passed via party lines using the reconciliation process, have mostly supported the SALT cap as a way of keeping blue states from what they criticize as a wasteful tax and spend model.
I don’t think a full repeal will happen and it is more likely the SALT deduction cap will be raised to $20,000 and tied to inflation. But I will continue to monitor progress on this provision as the final bill is crafted in Congress. Stay tuned for updates via the options below.
Trump SALT Repeal
Under the Trump/GOP tax reform bill for 2018 the deduction for Sate and Local taxes (SALT) related to property and sales taxes, on federal IRS tax returns was limited to $10,000. Tax payers will still need to itemize for this deduction, but will have a cap of $10,000 versus under prior rules where there was no limit.
The original plan was to eliminate this tax deduction entirely but faced with stiff resistance from GOP members in high tax states like California and New York, the $10,000 deduction allowance limit was instead put in place. Various calculations have shown that high income earners who live in high tax areas like Manhattan, San Francisco, and Seattle will likely take a hit on their tax bill for this area if their state and local taxes exceed $35,000.
IRS update on 2018 property taxes. The IRS formally responded to a common question for many tax payers looking to pre-pay their 2018 property taxes in 2017, so that they can claim the full deduction before the new GOP tax laws that limit this deduction come into effect.
The IRS announced that the deduction for their 2018 property taxes may only be deductible only if assessed and paid in 2017. Only the amount assessed by local governments can be claimed and and any pre-payments of potential or anticipated property taxes will not be deductible.
Most tax payers who current claim the SALT deduction may instead choose not to take this itemized deduction at all and instead take the much higher (nearly doubled from current levels) standard deductions in place with the new tax reforms.