- The unlimited SALT deduction allowed millions of Americans to use state and local tax bills to reduce federal taxes on a dollar-for-dollar basis.
- Beginning in 2017, SALT deductions were limited to $10,000 per year.
- Some Democrats are seeking to reinstate the unlimited SALT deduction, and might be willing to oppose Biden's spending plan to do it.
Some, including the SALT Caucus, want to party like it's 2017.
The State and Local Tax (SALT) deduction offers millions of Americans in high-tax states a federal tax break. Today, the deduction is capped at $10,000, but as recently as 2017, Americans could claim the deduction without limit. Legislators on both sides of the aisle seek to reinstate the unlimited deduction, and some Democrats are threatening to fight any spending bill that doesn't.
Pre-2017 SALT deduction
Prior to the 2017 Tax Cuts and Jobs Act, Americans in states like California and New York could take advantage of an extra benefit come tax time. The unlimited SALT deduction allowed residents to fully deduct taxes paid to state and local governments on their federal income tax return. The SALT deduction is an itemized deduction which includes state income tax (or sales tax), real estate taxes, and personal property taxes.
It works like this: Imagine you have $150,000 in adjusted gross income and $25,000 in itemized deductions, plus your total bill for property tax and state income tax is $20,000. Before 2017, you could claim the full SALT deduction, for deductions totaling $45,000. By itemizing your deductions, your federal taxable income would drop to just $105,000.
Read more: The Ascent's complete guide to taxes
Post-2017 SALT deduction
Following the passage of the Tax Cuts and Jobs Act, the SALT deduction is now limited to $10,000 per year. While Americans living in certain low-tax states will not feel the pain, those in high-tax states may miss out on thousands of dollars in tax deductions.
Let's revisit the example above, where you have $150,000 in adjusted gross income, $25,000 in itemized deductions, and a total state and local tax bill of $20,000. After 2017, you can only claim a $10,000 deduction for state and local taxes, halving your SALT deduction. In a post-Tax Cuts and Jobs Act world, your taxable income is $115,000. With a capped SALT deduction, your income tax bill could increase by thousands of dollars.
For some Americans, such as those living in the seven states without personal income tax, an unlimited SALT deduction is not very important. If your state and local taxes add up to only a few thousand dollars, the 2017 limit won't affect you. For other Americans, such as those living in California, with a top marginal tax rate of 13.3%, an unlimited SALT deduction can greatly reduce federal income tax liability come tax time.
It may come as no surprise that lawmakers representing Americans in high-tax states are fighting to bring back the unlimited SALT deduction. The bi-partisan SALT Caucus is made up of representatives from high-tax states such as California, New York, and New Jersey.
Democratic SALT Caucus members may have an opportunity to write their will into law in the coming months. With the pressure of low approval ratings in an election year, President Biden and Democrats are attempting to pass a spending bill ahead of midterm elections. The bill requires every Democrat's vote in the senate in order to pass, and has undergone a series of iterations to appeal to holdout Joe Manchin (D-WV).
The spending bill has better chances of passing the house, but if the SALT Caucus can rally enough support, the bill could be in danger in its current form. The SALT Caucus is currently composed of 26 Democrats and 8 Republicans, but co-chair Josh Gottheimer (D-NJ) is not stopping there. Gottheimer is believed to be courting other House Democrats to bolster the Caucus and the weight of their demands. If Gottheimer flips enough House Democrats, the bill could face serious headwinds in its current form. Which version of the bill will pass, if any, is yet to be seen, but the SALT deduction is currently one of the hottest topics when it comes to garnering the support of House Democrats.
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