Furthermore, House Republicans are advancing an increase in the cap on the state and local tax (SALT) deduction. The cap is currently set at $10,000 and this modification is a major part of their overall tax reform platform. As a reminder, this push is coming now because the TCJA (Tax Cuts and Jobs Act) provisions are expiring. They will expire after 2025 if Congress doesn’t act again.
In 2017, former President Donald Trump signed the TCJA into law. This law created a new limitation on taxpayers’ ability to deduct state and local taxes from their federal taxable income by capping such deductions to $10,000. This is a significant change, particularly for itemizers. It is particularly devastating for Americans who reside in high-tax states such as California, Illinois, New Jersey and New York. Recent analyses suggest that approximately 90% of filers utilize the standard deduction, rendering the SALT cap a critical issue mainly for those with higher incomes who itemize their tax breaks.
The House Committee on Ways and Means may soon be considering some very important legislation. This bill would increase the SALT cap. We are encouraged by the current proposals, which will provide state and local taxpayers in high-tax jurisdictions relief from some of their financial burdens. If legislators are able to fully repeal the SALT cap, nearly three-fourths of the benefits will go to households making $430,000 or more. This would be a huge blow to their economic well-being.
In an unexpected twist, as part of his campaign for re-election, Donald Trump has changed course and decided to support SALT cap repeal. He’s even promised to “repeal SALT” if he is re-elected. This commitment points to a larger potential change in tax policy direction if he were to be returned to office.
The Tax Policy Center released a detailed analysis showing undoing the SALT cap would overwhelmingly benefit upper-middle-income households. The amount of the standard deduction is scheduled to more than double. By 2025, it will go up to $15,000 for single filers and $30,000 for married couples filing jointly. Of this new increase, nearly all tax relief will likely go to households earning over $200,000 a year.
Garrett Watson, a senior policy analyst at the nonpartisan Tax Foundation, explained why the SALT cap matters. He thinks it’s a transformative first step in the larger tax reform debate.
“It all has to come together in the context of the broader package.” – Garrett Watson
The TCJA actually doubled the value of the standard deduction in 2018 and indexed it for inflation every year thereafter. This major boost for the standard deduction leads a majority of taxpayers to not benefit from itemized deductions such as SALT. As a result, IRS data shows nearly 90% of filers take the standard deduction. Instead, they avoid itemizing their deductions entirely.
The SALT limit is most harshly felt in states with lots of property and income taxes, which aren’t coincidentally low tax red states. For tax fairness reasons, higher earners tend to pay more in state income taxes and property taxes for most high-income earners due to their itemized deductions. This renders them more susceptible to the SALT cap’s draconian restrictions.
The ongoing discussions among House Republicans reflect a growing recognition of the challenges posed by the SALT cap, especially for constituents in high-tax states. You can see these debates play out in this week’s House Committee on Ways and Means markup. It will be interesting to observe how lawmakers decide to address this hot button issue.
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