What proposed SALT changes could mean for your next tax bill

As negotiations progress on the Build Back Better Act (BBB), the state and local tax deduction (SALT) has emerged as the newest internal party negotiating tool in the Democrats’ drive to pass the $ 1.75 trillion welfare spending package.

In particular, Democrats in states with high state and local taxes like California, New York, and New Jersey support a proposal to increase the cap on the amount of state and local taxes that individuals can deduct from their federal income taxes from $ 10,000 to $ 72,500.

The SALT deduction is a way for people, especially in states with high income, sales, and wealth taxes, to avoid paying double taxes they paid for services provided by states and communities – things like education, health care, and so on Transport. Prior to 2017, taxpayers who had their tax returns itemized could claim an unlimited dollar amount as a SALT deduction; Subsequently, a Republican Congress passed the Tax Cuts and Jobs Act (TCJA), which limited the eligible SALT deduction to $ 10,000 per year.

The imposition of this cap primarily affected high earners in blue states and allowed the government to raise more money from taxes, though this was offset by sweeping tax cuts in the same Republican law at the time. Now the push to raise the cap is a way of getting more democrats – especially moderates and the above-mentioned lawmakers from high-tax countries with high earners – involved in the broader reconciliation law.

However, since SALT’s existing cap aligns with the common progressive belief that high earners should pay more taxes to fund investments like the BBB, Democratic support for an increase can be confusing. Here’s why some Democrats want the SALT cap lifted anyway, what that would mean for US tax policy – and how that could affect ordinary American taxpayers:

How will a higher SALT deduction cap affect me?

If the currently discussed changes to the SALT cap on the reconciliation bill are made, it will depend on your income, where you live and other specifics such as ownership, whether or not they will affect your tax bill.

As Vox’s Emily Stewart explained in April, people can deduct some expenses from their taxable income.

As Stewart writes:

When people file their taxes, they can deduct certain expenses to lower their taxable income. A lot of people just take the “standard deduction” and tap off a lump sum. However, others choose to do so break down their deductionsso they can pull off things like charitable deductions and medical expenses. In general, taxpayers choose the route that is more beneficial to them – whichever route leaves them with less taxable income.

The types of expenses people can deduct – such as income or sales tax, property tax, medical expenses, and charitable donations – are not going to change. However, the amount they can deduct due to these state and local taxes could.

Much like how the 2017 deduction cap affected high earners – typically those who earn more than $ 100,000 – by effectively increasing annual income subject to federal tax, an increase in the deduction cap would primarily benefit those same high earners.

In addition, higher earners are more likely to own property and therefore pay property taxes in their state and locality – another expense that people can deduct from their taxable income.

According to the Tax Policy Center, a joint project between the Urban Institute and the Brookings Institution, “16 percent of taxpayers with incomes between $ 20,000 and $ 50,000 claimed the SALT allowance in 2017, compared with 76 percent of single income taxpayers between 100,000 and 100,000 US dollars, 200,000 US dollars and over 90 percent of taxpayers with an income of over 200,000 US dollars. “

High earners in high-tax locations – mostly blue states like California, New York, and New Jersey – are more likely to claim the SALT deduction to reduce their taxable income.

What are the specific proposed changes to SALT and who will support them?

Basically, the proposed changes to the SALT deduction would increase the maximum deduction from $ 10,000 to $ 72,500 per year, with the increased cap expiring on January 1, 2032.

According to the Roll Call, the new cap of $ 72,500 would also apply retrospectively at the beginning of the year.

Legislators in favor of lifting the SALT deduction cap include Reps Tom Suozzi (D-NY), Mikie Sherrill (D-NJ), and Josh Gottheimer (D-NJ) – all representing counties with lots of high earners who pay high taxes. But also high-profile progressives like Rep. Katie Porter (D-CA) are in favor – in fact, Porter, whose district in California had an average household income of $ 115,427 and an average home value of $ 794,400, was a driving force behind the increase the SALT cap.

In September, Porter defended her position on the Save America podcast, arguing that keeping the current SALT cap or eliminating the deduction altogether would mean taxpayers would essentially double pay some taxes.

“No American with the same income, the same labor force, the same salary should owe more federal taxes just because of where they live,” Porter said.

The SALT trigger described above is the version currently featured in the latest House version of the Build Back Better Act – but it’s not the only plan. Sens. Bernie Sanders (I-VT) and Bob Menendez (D-NJ) have proposed an alternative plan – one that would keep the limit of $ 10,000, but only for taxpayers who are more than about $ 400,000 to $ 550,000. Earn dollars, according to estimates by the non-partisan Joint Tax Committee. There would be no SALT cap for taxpayers who earn less.

Senate Majority Leader Chuck Schumer has proposed his own idea that would completely abolish the SALT ceiling for the next five years and bring it back to the $ 10,000 ceiling in 2026.

When did the SALT deduction change?

The SALT deduction has been part of tax policy since federal income tax was introduced in 1913 and, apart from a few minor changes in the 1960s and 1970s, hadn’t changed significantly until the 2017 revision by the TCJA.

While the legislative changes of 1964 and 1978 regulated deductibility, the TCJA dealt with deductibility.

Taken alone, the 2017 cap, which should expire in 2025, looks like a progressive tax policy. But it was passed by a Republican Congress to make up for a loss of revenue caused by lowering the marginal tax rate for the highest earners from 39.6 percent to 37 percent and the corporate tax rate from 35 percent to 21 percent – hence the “tax cuts” part. the bill. Overall, according to the Tax Policy Center, the Congressional Budget Office forecast at the time that the Republican tax law would increase the federal deficit by nearly $ 1.9 trillion in the first decade.

Will the SALT changes actually become law?

The proposed SALT changes – either the current version of the House of Representatives or the Senate’s alternative plans – are by no means certain. As part of the BBB, an increase in the current SALT cap still has a long way to go.

In particular, as Li Zhou of Vox explained on Friday, the reconciliation bill still has to be passed in the House of Representatives – which at this point will probably not happen until mid-November at the earliest – before it goes to the Senate and then back to the House of Representatives for (potential)) final passage. In both chambers, the joint support of the Democrats is crucial – with a Senate majority of 50 seats passed by Vice President Kamala Harris in her role as Senate President, the party has no margin for error in one chamber and only a few votes left in the narrow split house.

SALT could help with this, however. The lifting of the current SALT cap was a key priority for Gottheimer, who leads the small group of moderate Democrats in the House of Representatives who have so far resisted without an assessment by the Congressional Budget Office, to bolster his support for reconciliation.

“We are confident that with that [SALT relief] According to the agreement, we can advance this extremely important package and will continue to work to ensure that this tax cut is legally signed in order to bring this relief to our voters as soon as possible, ”Gottheimer said in a Friday statement with Sherrill and Suozzi.

https://www.vox.com/2021/11/6/22766735/salt-deduction-cap-democrats-biden