What does SALT stand for, and what are the Pros and Cons?
SALT is an acronym for State and Local Taxes. The current cap on deductions for state and local taxes is $10,000 as enacted in the 2017 Tax Cuts and Jobs Act (TCJA). Since 2017 (and through 2025), as the current law exists, only $10,000 in state and local taxes (which includes property taxes) can be deducted on federal tax returns. The law mostly affected people with homes in high property-tax states (who routinely paid over $10,000 in property tax, not to mention sales tax) and where their general state taxes were already high (e.g., California, New Jersey, New York).
WHY is this important NOW?
Altering (or eliminating) the cap might make it easier for states to raise taxes to pay for public services. And local governments might have a better chance at getting needed tax increases passed. The pandemic has hurt many states’ budgets as their residents continue to reel from the COVID-19 economic downturn.
The topic goes beyond simple politics. Many economists believe that a complete repeal of the cap on the SALT deduction would be costly to the federal government. A recent (July 2021) estimate by the Tax Foundation put the loss to the Federal government at $380 billion. As of October 7, 2021, the infrastructure spending package was cut from $3.5 trillion to about $2 trillion: That $380 billion in lost revenue becomes much more important.
Who does it affect?
Taxpayers in the bottom two income levels would not generally be affected on their tax returns one way or the other. If they do not itemize, or if their SALT deductions rarely reach $10,000, there would be little change in their after-tax income if the deduction cap were taken away.
However, at higher income (and tax rate levels), the top 5% and 1% of income earners would see an increase in after-tax income of 1.25% and 2.79%, respectively, should the SALT deduction cap be eliminated.
SALT can affect your after-tax income significantly. We will keep you updated, and if the deduction cap is not eliminated now, there are only a few more years until 2025, when the 2017 Tax Cuts and Jobs Act (TCJA) is due to end.
That the infrastructure bill is teetering on the SALT deduction cap—and could depend on how individuals in the congress vote—makes this very personal SALT deduction cap issue worthy of our attention. There’s no doubt that something needs to be done about our country’s infrastructure.
Contact your LSL advisor for questions about how the SALT deduction cap applies to your specific situation.