The sands of the political landscape could shift beneath the 2017 Tax Cuts and Jobs Act signed into law by President Donald Trump. A daily fixture within this law is the state and local tax or SALT deduction, now subject to potentially significant changes. The SALT deduction might see its existing cap, currently at $10,000, rise to a nimble $20,000 if a new proposal sees the light of day.
Greenlighting this change could have ramifications that echo beyond the halls of Capitol Hill and into the pockets of millions of married taxpayers, who could enjoy greater tax refunds in 2024.
Why the Change Now?
It's essential to remember the backdrop against which the SALT deduction operates. American taxpayers could deduct all their state and local taxes from their federal taxes before implementing the cap. Even though this seemed beneficial on the surface, critics arose from various quarters, arguing that this approach primarily favored the wealthy homeowners lodged within states with hefty taxes like New York and California.
Moreover, middle-class homeowners started feeling pressure due to the $10,000 cap, especially those living in regions where property taxes were steadily climbing. No one was exempt from the reach of this cap, not even married filers, putting a damper on the spirit of an institution that otherwise saw a boost in the standard deduction and tax brackets. This was due to their earnings coming from two distinct sources.
Enter Rep. Mike Lawler, a Republican from New York, providing a breath of fresh air with a different perspective. He introduced the revision proposal, saying it would correct a wrong and bring a fairer system. With mounting inflation and rising housing costs, Lawler's constituents saw a need for tax relief, with a potentially nationwide effect.
The Financial Impact of the Proposed Change
The financial tally of doubling the SALT cap to $20,000 is around a $12 billion dip in federal tax revenue. This statistic comes into focus when held against the backdrop that the SALT deduction alone cost the federal government $69 billion in tax revenues in 2017. Interestingly, this was the same year the $10,000 limit was implemented.
How Would the SALT Marriage Penalty Elimination Act Work?
The SALT Marriage Penalty Elimination Act, better known as the revision proposal, would pave the way for state and local tax deductions to increase to $20,000, but this change would only be for the tax year 2023. Specific to joint returns for couples who had adjusted gross income below $500,000 in 2023, only the nation's top-earning married couples would find themselves outside the purview of this change.
Should the act come into law, married couples could now double their SALT deduction for the ongoing tax season. Strap in for a flashback to the $10,000 per filer cap come post-2023, with no regard for filing status. This arrangement will continue till the close of 2025 when the SALT cap and similar provisions stand to be phased out from the Tax Cuts and Jobs Act.
Will the Elimination Act Make the Cut?
The House of Representatives, according to the Tax Policy Center, could put the Elimination Act to the test as soon as next week. However, lawmakers face a conundrum on the SALT deduction cap. Even though Republicans are traditionally not inclined towards higher taxes for high net-worth individuals, they seem to view the SALT limit as a tool to prevent taxpayers from wealthier states from enjoying more significant tax benefits.
Before the cap enactment, around 71% of the SALT deduction fell to taxpayers with incomes above $200,000. Discerning the broader impact of the SALT cap, Democrats are standing up for middle-class families in states with high property taxes, primarily across the Northeast and West Coast regions.
With calls from numerous lawmakers over the past few years to roll back the SALT deduction cap or temper its impact, they have struggled to find support or generate the necessary push. Interestingly, the latest proposition has been proposed by a Republican lawmaker, coinciding with a growing GOP interest in providing SALT relief to homeowners across the country.
With a sense of urgency and passion, the proposer, Rep. Mike Lawler, states, "We must finish the job and get this passed in the Senate and sent to the President's desk expeditiously. Hard-working middle-class families across our country deserve this critical relief." Only with time will we know if these changes will come to fruition.
