The 118th (2023-2024) U.S. Congress is currently at the forefront of discussions surrounding the limitation on state and local taxes, known as the SALT deduction limitation. This restriction, set at $10,000, has been a contentious issue since its inception with the Tax Cuts and Jobs Act (TCJA) in 2017. In this SEO-friendly article, we will delve into the intricacies of the SALT deduction limitation, its impact on taxpayers, and the proposed legislative changes aimed at liberalizing this cap.
Understanding the SALT Deduction Limitation
The SALT deduction limitation places a cap on the amount of state and local taxes (SALT) that taxpayers can deduct from their federal taxable income when itemizing deductions. Enacted by the TCJA, this provision began affecting taxpayers in 2018 and is slated to expire after 2025. The current cap of $10,000 means that individuals who pay more than this amount in combined state and local taxes can only deduct a portion of these taxes from their federal taxable income.
Impact on Taxpayers
To illustrate the impact, consider a homeowner in a high-tax state like New York, paying $16,000 in state income tax and $10,000 in local property taxes, totaling $26,000 in state and local taxes. Despite the total payment, they can only deduct $10,000, resulting in a loss of $16,000 in state and local tax itemized deductions. With a 24% tax bracket, this could lead to a federal income tax increase of $3,840.
States Most Affected
States with high state and local tax rates are most affected by the SALT limitation. Notably, New York, New Jersey, California, Connecticut, Illinois, and Maryland have been identified by experts as the most impacted. Residents in these states are more likely to exceed the $10,000 SALT deduction cap, leading to higher federal tax bills.
Controversy and Work-Arounds
The SALT limitation has been controversial from the start, prompting some states to develop complex work-arounds favoring affluent taxpayers. As the law is set to expire in 2026, the 118th Congress is considering three bills aimed at liberalizing the SALT limitation.
Proposed Legislative Changes
- H.R. 160 – SALT Fairness Act of 2023: Sponsored by the bipartisan SALT Caucus, this bill seeks to repeal the $10,000 cap entirely, providing relief to affected taxpayers.
- H.R. 680 – Tax Relief for Middle Class Families Act of 2023: This bipartisan bill aims to increase the limitation to $200,000 for married couples and $100,000 for others, offering a middle ground for SALT deduction.
- H.R. 339 – SALT Marriage Penalty Elimination Act: Focused on married couples, this bill proposes an increase in the current cap from $10,000 to $20,000 for joint tax returns.
It is noteworthy that all sponsors of these bills hail from states with high state and local tax rates.
Considerations for Taxpayers
Tax deductions primarily benefit those who itemize deductions, and for 2023, the standard deduction is $13,850 for unmarried taxpayers, $20,800 for heads of household, and $27,700 for married couples filing jointly. Consequently, any law change will predominantly benefit wealthier taxpayers who itemize their deductions.
The Potential Impact
The Tax Foundation provides insights into areas with the highest state and local taxes, indicating where liberalization of the SALT limit would be most beneficial. However, conservative members of the House may resist a total repeal of the SALT limit.
Conclusion
The 118th Congress is at a crossroads regarding the SALT deduction limitation, with proposed bills offering potential relief to affected taxpayers. The debate centers on the extent of these changes and their impact on different income groups. As discussions unfold, taxpayers, especially those in high-tax states, await the outcome that could reshape their federal tax obligations. Stay informed to navigate the evolving landscape of SALT deduction limitations.
