By Jo Madonna, E.A. | November 8, 2019

Understanding the Cap on SALT Deductions

Your first thought might be: “Does this apply to me?” Well, the easiest way to know is to look for a Schedule A (the schedule used for itemized deductions) on your most recent tax return. If you have a Schedule A, then the cap on SALT Deductions will apply to you.

On the other hand, if you do not have a Schedule A, you will notice that your 1040 tax return will include a standard deduction amount. The standard deduction amount in the newest tax law, Tax Cuts and Jobs Act (TCJA), is almost double what it was previously, so many people who itemized before might now claim the standard deduction instead.

So, let’s discuss the new State-and-Local-Tax limitation or SALT. There has been much debate over the SALT provision in the new TCJA, which only allows taxpayers to deduct up to $10,000 of their state and local taxes on their federal returns if they itemize. Before the SALT cap in TCJA, taxpayers were allowed to deduct 100% of their state and local property taxes, which was a massive benefit for those who pay high state income taxes or high property taxes.

Is this Fair?

Many people believe that the SALT cap is flawed and unfair, which is why it SALT Cahas caused so much discussion. They feel this limitation is targeting high-income earners and those who live in higher-tax states like California and New Jersey.

In fact, a recent study done by the Institute on Taxation and Economic Policy (Institute on Taxation and Economic Policy, 2018) found that 63% of the effect of the SALT cap falls on the wealthiest 1% of taxpayers. And those who utilize the SALT deduction the most would undoubtedly be those in higher-taxed states or jurisdictions. The more money you earn – and the more state and local taxes you have to pay – the more the populations of those higher-taxed states would be directly affected.

But remember that the TCJA did dramatically reduce the number of filers that used itemized deductions. Because the standard deduction rate nearly doubled, many filers who would have otherwise benefited from itemizing would now utilize that deduction. So, as a result, a more significant number of those who do still itemize would be in higher-income households.

Total Itemizers in 2019
Share of Each Income Group Itemizing Share of Total Itemizers
Poorest 20% 2% 1% 1% 1%
Second 20% 9% 3% 6% 4%
Middle 20% 23% 8% 15% 11%
Fourth 20% 43% 17% 28% 24%
Next 15% 72% 33% 35% 36%
Next 4% 90% 57% 12% 16%
Richest 1% 95% 85% 3% 6%
ALL 30% 13% 100% 100%
Source: Institute on Taxation and Economic Policy

The Upside

For high-income taxpayers, this cap did increase federal taxable income and, in turn, increased their federal tax liability. However, the TCJA offers an upside in other areas, such as lower statutory tax rates, a much larger Alternative Minimum Tax exemption, and reduced corporate income tax rates.

Even with the new cap on SALT deductions, many other factors ultimately allowed taxpayers to have a lower tax liability overall.  According to the Tax Policy Center (Frank Sammartino, 2018),  65% of taxpayers were estimated to pay less in taxes in 2018 than they would have under the previous law. Only 6.3% would have a higher tax liability. So, even with the SALT cap, many taxpayers can find benefits from other areas of the TCJA.

Why is the SALT Important for the Federal Government?

Federal income taxes are revenues that our government uses to provide programs, goods, and services that benefit the American people. The importance for the federal government is how much money it will lose or gain as an impact from the capped SALT deduction.

While being developed, the TCJA was scrutinized for benefiting the wealthy and possibly decreasing federal revenues. By reducing tax rates and manipulating other provisions, policymakers were worried that the federal revenues would suffer and that the most wealthy would benefit. The SALT provision, however, was an area that policymakers suggested would keep the tax code more progressive.

The nonpartisan Joint Committee on Taxation (Eastman, 2019) estimated that the new $10,000 limitation would raise $668 billion from 2018 to 2027. If the cap were eliminated, the revenue would be lost – a major concern for those who are worried about revenue-generation within the TCJA policy.