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Major Changes to State and Local Tax Deductions: What They Mean for You

Author: Elite Consulting, P.C. | | Categories: Business Compliance Strategies , Business Tax Efficiency , Federal Tax Changes , High-Tax States Relief , Small Business Compliance Tips , Small Business Tax Implications , Small Business Tax Tips , State and Local Tax Deductions , State Income Tax Deduction , Tax Law Changes , Tax Policy Changes , Tax Reform Updates

Blog by Elite Consulting, P.C.

Big Changes Coming to State and Local Tax Deductions in the US

Taxes can feel confusing, especially when rules keep changing. One rule that many people talk about is the state and local tax (SALT) deduction. This deduction allows people in the United States to subtract some of the taxes they pay to their state and local governments when filing their federal taxes. Right now, there is a $10,000 limit on this deduction, but lawmakers are discussing some big changes that could raise this limit.

If you’re a homeowner, small business owner, or someone who lives in a state with high taxes, these changes could make a big difference for you. Let’s break it all down in simple terms, so you can understand what’s happening and why it matters.

 

What is the SALT Deduction?

The state and local tax (SALT) deduction lets taxpayers deduct certain taxes they pay to their state or local governments from their federal taxes. These taxes include:

  1. State income taxes: The money you pay to your state based on your income.
  2. Local property taxes: Taxes on your home or other property.
  3. Sales taxes: Some people choose to deduct the sales taxes they paid instead of state income taxes, depending on which one is higher.

The SALT deduction helps people avoid being taxed twice on the same income—once by their state or local government and again by the federal government.

 

The $10,000 Limit on SALT Deductions

Before 2018, there wasn’t a cap (or limit) on how much you could deduct for state and local taxes. But then, the Tax Cuts and Jobs Act (TCJA) introduced a cap of $10,000. This means:

  • If you’re single, married, or filing jointly, you can only deduct up to $10,000 in state and local taxes total.
  • If you’re married but filing separately, the cap is $5,000 per person.

For many people, this change didn’t make a big difference. But for those living in states with high taxes—like California, New York, and New Jersey—the $10,000 limit has caused frustration. Homeowners and small business owners in these states often pay much more than $10,000 in property taxes alone, meaning they can’t deduct the full amount they pay.

 

Why Lawmakers Are Talking About Changing the Limit

The SALT deduction cap has been a hot topic in politics. Some lawmakers argue that the cap is unfair to people in high-tax states, where $10,000 barely scratches the surface of what they pay in state and local taxes. Others say the cap helps the government collect more federal tax revenue, which is important for funding programs and reducing the national debt.

Now, lawmakers are discussing possible changes to the SALT deduction cap. Here are some of the ideas they’re considering:

  1. Raising the Limit
    One proposal is to raise the cap to something like $100,000 for individuals and $200,000 for married couples. This would allow more people to deduct the full amount of their state and local taxes, especially in high-tax areas.

  2. Adjusting for Inflation
    Another idea is to adjust the cap based on inflation. Over time, the cost of living increases, and so do taxes. Adjusting the SALT cap for inflation would help ensure that people aren’t losing out because of rising costs.

  3. Removing the Cap Entirely
    Some lawmakers want to get rid of the SALT deduction cap altogether, going back to the way it was before 2018. They argue that the cap unfairly punishes people in certain states while giving an advantage to others.

  4. Targeting the Changes
    Another option being discussed is to limit SALT deduction benefits to middle-income and low-income households. This would make sure wealthier taxpayers don’t get the biggest benefit from the change.

Who Benefits from These Changes?

Changes to the SALT deduction cap would benefit different groups of people, especially:

  1. Homeowners in High-Tax States
    If you live in a state with high property taxes, like New York, New Jersey, or Illinois, raising or removing the SALT cap would mean you could deduct more (or all) of the property taxes you pay.

  2. Small Business Owners
    Small business owners who pay state income taxes or own property would also see savings. These deductions could free up money to reinvest in their businesses.

  3. Middle-Class Families
    In states where property taxes and income taxes are high, middle-class families often feel squeezed by the $10,000 limit. Raising the cap would help them keep more of their hard-earned money.

What are the Pros and Cons?

Every tax rule has its advantages and disadvantages. Here’s a quick look at the pros and cons of changing the SALT deduction cap.

Pros

  • Fairness for High-Tax States: People living in states with high taxes would be able to deduct more of what they pay.
  • Increased Savings: Homeowners and small business owners could save thousands of dollars on their federal taxes.
  • Economic Benefits: With more money in their pockets, taxpayers might spend or invest more, boosting local economies.

Cons

  • Revenue Loss for the Federal Government: Raising or removing the SALT cap would reduce the amount of tax money the federal government collects, which could lead to budget shortfalls.
  • Benefits Wealthier Taxpayers More: Critics argue that wealthier individuals would see the biggest benefits, while middle- and lower-income families might see little or no change.
  • Complexity: Adjusting the cap could make the tax code even more complicated.

 

How to Prepare for Possible Changes

If you’re a homeowner, small business owner, or someone who pays a lot in state and local taxes, here are a few ways you can prepare for potential changes to the SALT deduction:

  1. Stay Informed
    Tax laws change all the time, so it’s important to stay updated on new rules. Pay attention to news about the SALT deduction and other tax reforms.

  2. Work with a Tax Professional
    A tax expert can help you understand how these changes might affect you. They can also suggest strategies to save money on your taxes, like maximizing other deductions or credits.

  3. Keep Good Records
    Make sure you’re keeping track of all the taxes you pay—property taxes, state income taxes, and sales taxes. This information will be important if the SALT deduction cap is raised or removed.

  4. Plan Ahead
    If changes to the SALT deduction are announced, consider how they might impact your tax bill. You may want to adjust your finances or savings plan to make the most of any new rules.

 

The state and local tax (SALT) deduction is a big deal for many taxpayers, especially in states with high taxes. While the current $10,000 cap limits how much people can deduct, changes may be coming soon. Lawmakers are discussing options like raising the cap, adjusting it for inflation, or even removing it altogether.

If you’re someone who pays a lot in state or local taxes, these changes could have a big impact on your federal tax bill. By staying informed, keeping good records, and working with a tax professional, you’ll be ready to take advantage of any new rules.

Want to learn more about how tax changes could affect you? Talk to a tax expert or follow updates from reliable sources. Understanding these changes now can help you save money in the future!

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