The federal deduction for state and local taxes (SALT) has been a hot topic since 2017, especially for residents in high-tax states. Here’s a quick breakdown of what it is, proposed changes, and how to navigate your own tax situation.
What is the SALT Tax Deduction?
The SALT deduction allows taxpayers who itemize their federal income tax returns to subtract certain state and local taxes they’ve paid. This typically includes:
- State and local income taxes OR state and local sales taxes (you choose one, not both)
- Real estate property taxes
- Personal property taxes
Before 2018, there was no limit to how much you could deduct. However, the 2017 Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at $10,000 per household per year ($5,000 for married individuals filing separately). This cap is set to expire at the end of 2025.
The idea behind the deduction is to prevent “double taxation” – taxing income that has already been paid to state and local governments. However, it disproportionately benefits higher-income earners in high-tax states.
What are the Proposed Changes?
With the $10,000 cap expiring at the end of 2025, discussions are buzzing in Congress about its future. Several proposals are on the table, reflecting a divide between those who want to fully restore the deduction and those who prioritize federal revenue and tax fairness.
Recent reports indicate House lawmakers have reached a tentative deal to raise the SALT cap to $40,000 per household, with an income limit of $500,000. This proposed cap would also grow by 1% annually for ten years. Earlier proposals included:
- Raising the cap to $30,000 for married couples earning up to $400,000 (and $15,000 for single filers up to $200,000), with a phase-down above those limits.
- More aggressive proposals, sometimes pushed by lawmakers from high-tax states, have included caps as high as $62,000 for individuals or $124,000 for joint filers, or even full repeal. These more generous proposals would primarily benefit the wealthiest taxpayers and significantly impact federal revenue.
It’s important to remember that these are proposals, and the final outcome is subject to ongoing negotiations and could change significantly before any bill passes.
What Should You Do with Your Own Circumstances?
The impact of SALT changes depends heavily on your income, where you live, and your itemized deductions. Here’s what to consider:
- Understand Your Current Tax Situation:
- Do you itemize deductions? The SALT deduction only benefits those who itemize. If your standard deduction is higher than your itemized deductions, the SALT cap (or any changes to it) might not directly affect your tax bill. For 2025, the standard deduction is $15,000 for single filers and $30,000 for married couples filing jointly.
- How much do you pay in state and local taxes? Add up your state income/sales taxes and property taxes. If this amount is currently above $10,000, you’re likely impacted by the current cap.
- Monitor the Legislative Landscape: Tax laws are fluid. Keep an eye on news from Congress regarding tax reform, especially as the end of 2025 approaches. Reliable financial news sources and government websites are your best bet.
- Consider “SALT Cap Workarounds” (for business owners): If you own a pass-through entity (like an S-Corp or partnership), many states have enacted entity-level tax laws that allow the business to pay state taxes directly. This can effectively bypass the individual SALT cap for owners, as the business’s tax payments reduce your share of the business income, which is not subject to the $10,000 cap. This is a complex area that is also up for debate, so consult with a tax professional.
- Consult Professionals: This is the most crucial step. A qualified tax advisor can:
- Assess your specific financial situation.
- Explain how current and proposed SALT changes might affect you.
- Help you plan for future tax years and identify any available strategies to optimize your tax position.
The SALT deduction debate highlights the complex interplay between federal and state taxation. While changes are on the horizon, proactive understanding and professional guidance will help you navigate the evolving tax landscape.
Conclusion
The SALT deduction debate highlights the complex interplay between federal and state taxation. While changes are on the horizon, proactive understanding and professional guidance may help you navigate the evolving tax landscape. If you have questions about how this upcoming change may impact you, contact the Voisard Asset Management Group team today.
