The SALT income tax deduction cap was increased to $40,000 in Trump's bill. Should you take it?

Boston Globe

2 days ago

For the last seven years, the tax code has limited the amount taxpayers may write off for state and local taxes to $10,000. Prior to that, the cap was a much more generous $40,000.
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The $10,000 cap was imposed by Congress as part of the first Trump administration's mammoth tax cut plan. It was quite costly to taxpayers in places like Boston's western suburbs, where local property tax bills range in excess of $25,000 (and where the state income tax is 5 percent and the sales tax 6.25 percent).
Indeed, for some of the state's wealthiest residents, local property taxes plus state taxes exceeds $40,000. (Taxpayers must choose to include state income taxes or state sales taxes in their calculations, but not both.)
This year's tax and spending bill, pushed by the current Trump administration, reversed what the previous Trump administration did by quadrupling the cap back to $40,000. It was done mostly to keep Republican Congress members who represent wealthy suburban districts on board for a bill that, overall, favors the well-off over those struggling to get by.
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Here's what you should know about the SALT income tax deduction.
Who qualifies for the SALT deduction?
All taxpayers who pay state and local taxes may take the deduction, but it only makes sense for those who are relatively well-off. A threshold question for all federal income taxpayers is whether to take the
How does the standard deduction work?
The amount of income tax a taxpayer owes is based, logically enough, on how much income the taxpayer has. The more income, the more taxes . But the tax code allows for gross income to be reduced by a multitude of deductions, producing a taxable 'adjusted gross income.' Wealthier taxpayers who can afford CPAs and tax lawyers scour the tax code for deductions, while the vast majority of taxpayers simply accept a lump sum 'default' deduction, known as the standard deduction, which is set by Congress.
What are the most common deductions for those who itemize?
Besides state and local taxes, common deductions are for mortgage interest on a primary residence or second home; charitable contributions; and out-of-pocket medical and dental expenses. All are subject to certain limitations.
Why take the standard deduction instead of itemizing?
If all your itemized deductions come out to a sum that is less than the standard deduction, then the obvious choice is to take the standard deduction. Taking the standard deduction is also less time-consuming.
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How much is the standard deduction?
The standard deduction was greatly increased — almost doubled — under the first Trump administration tax cut. For individual filers it went from $6,500 to $12,000; for joint returns, $13,000 to $24,000. The tax bill enacted this month bumps up the standard deduction for single filers to $15,750 and for joint filers $31,500. It's a huge increase, one that benefits the vast majority of taxpayers, including those with lower and moderate incomes and do not itemize.
What percentage of taxpayers take the standard deduction?
Taxpayers have overwhelmingly — and increasingly — opted for the standard deduction. Since the 2017 tax cut, the percentage of Americans who take the standard deduction has skyrocketed to more than 90 percent, compared to less than 70 percent as recently as 2020.
How long has the SALT tax reduction been around?
It dates back to the advent of the federal income tax more than a century ago. Initially, the SALT deduction was unlimited, meaning you could deduct from your taxable income every dollar you paid in state and local taxes, without a cap.
How has SALT changed recently?
The biggest change came when, at Trump's behest, a Republican-controlled Congress in 2017 capped it at $10,000 over the objections of many blue state lawmakers.
What was the rationale for reducing the SALT deduction in 2017?
Trump in his first administration successfully lobbied for one of the largest tax cuts in history, including much lower personal and corporate income tax rates, higher standard deductions, and a doubling of the child tax credit. (A tax credit is a dollar-for-dollar reduction in taxes owed, as opposed to a tax deduction, which is a reduction in taxable income.) The 2017 tax cuts, however, were not offset by spending reductions. One relatively minor way the 2017 law sought to pay for the tax cuts was by slashing the SALT deduction by 75 percent.
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What were the politics behind the 2017 SALT reduction?
The SALT deduction favors mostly blue states that vote reliably Democratic in presidential elections. The Trump administration apparently felt politically safe imposing a heavier tax burden on taxpayers in states Republicans consider unwinnable.
So why did the Republican-controlled Congress this year increase the SALT cap to $40,000?
This year's tax bill passed the House by the slimmest of margins, 215-214, with all Democrats opposed and two Republicans voting against it on the grounds it explodes the national debt. Before the vote, a few moderate Republicans from blue states lobbied for increasing the SALT deduction cap. Doing so was apparently the price bill proponents were willing to pay to keep those few crucial Republican votes in line.
When does the higher SALT deduction go into effect?
Immediately. Taxpayers can take advantage of it before next year's midterm elections, which affords a modest political advance to Republicans. (Some of the most serious — and unpopular — cuts to the social safety net won't go into effect until after the midterms, another possible political advantage for Republicans.)
How long will the higher SALT deduction continue?
It will increase by $1,000 each year through 2029, but then revert back to $10,000 in 2030, unless Congress says otherwise.
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