Copyright © Daniel Cullinane CPA.
The Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) represents the most significant overhaul of the tax system in decades. One of the most contested provisions during the bill’s drafting was the proposed repeal of the itemized deduction for state and local income, sales, and property taxes (SALT deduction). The authors report the latest status of the SALT deduction, present the common arguments for and against repeal, and provide a brief overview of the SALT deduction’s impact during the last major tax reform debate in 1986.
When Congress released its framework for tax reform in the fall of 2017, it only allowed itemized deductions for interest paid on home mortgages and charitable contributions, suggesting a repeal of the SALT deduction. A repeal of the SALT deduction would increase federal revenue by an estimated $1.3 trillion over a 10-year period, affecting approximately 24% of taxpayers nationwide (Frank Sammartino and Kim Rueben, Revisiting the State and Local Tax Deduction, Tax Policy Center: Urban Institute and Brookings Institution, Mar. 31, 2016, http://tpc.io/2kj1zKq). On December 15, 2017, Congress released its conference agreement bill, the Tax Cut and Jobs Act (H.R. 1) (TCJA), which did not repeal the SALT deduction entirely, but instead limited the deduction to $10,000 for state and local income, sales, and property taxes paid, applying to tax years beginning after December 31, 2017, and scheduled to sunset after December 31, 2025 (Wilson Andrews and Alicia Parlapiano, “How the Final Tax Bill Will Affect Families, Homeowners, Businesses and More,” New York Times, Dec. 14, 2017, http://nyti.ms/2yYXAXY). In addition, the bill increases the standard deduction to $12,000 for unmarried tax filers and $24,000 for joint filers, meaning taxpayers will require itemized deductions exceeding these levels in order to realize any benefits from the SALT deduction. Filers who reside in states that have an income tax and do not own a home will most likely not be able to take the SALT deduction under the bill due to the increase in the standard deduction. The TCJA was signed by President Trump on December 22, 2017, and will take effect for tax years after December 31, 2017 and before January 1, 2026.
The states impacted most severely by the $10,000 cap on the SALT deduction are California, New York, New Jersey, Illinois, Massachusetts, Connecticut, and the District of Columbia (Greg David, “As Trump Talks Taxes, It’s Time To Zero in on Deductibility,” Crain’s New York Business, Feb. 28, 2017, http://bit.ly/2CEVEpX). These states have taxpayers with significant amounts of taxes beyond the $10,000 cap, which cannot be deducted. States with no income taxes, such as Texas and Florida, will be less affected, since taxpayers can elect to deduct the sales tax they paid during the year in lieu of state and local income taxes. The conference bill also does not repeal the individual alternative minimum tax (AMT), instead moving the phaseout threshold up to $500,000 for single filers and $1,000,000 for joint filers (http://nyti.ms/2oNdh4v).
The tax code was last overhauled more than 30 years ago, when President Ronald Reagan signed the Tax Reform Act of 1986 (P.L. 99-514) (TRA ’86). One of the more controversial issues debated in that process was the possible repeal of the SALT deduction. This article examines the practical implications and limitations of the SALT deduction, briefly explores the previous attempt to repeal the deduction as context to the existing debate, and examines the potential impact the $10,000 limitation in the TCJA could have on taxpayers that utilize the SALT deduction.
Prior to the TCJA, the Internal Revenue Code (IRC) section 164 provided taxpayers with an itemized SALT deduction [IRC section 164 (a)(1), (2), and (3)], subject to the AMT. In addition, taxpayers may elect to deduct state and local general salestaxes in lieu of deducting state and local income taxes [IRC section 164(b)(5)(A)]. The sales tax deduction, which had been repealed in the TRA ’86, was temporarily reinstated in 2004 with varying expiration dates; Congress made sales tax deductibility permanent beginning after December 31, 2014, in the Protecting Americans from Tax Hikes Act of 2015 (P.L. 114-113).
Exhibit 1, taken from the most recent data from the IRS, details the number of taxpayers that claimed the SALT deduction and the cost of the benefit of the deduction in the 2015 tax year. The states with the largest SALT deductions claimed are listed.
State and Local Tax Deduction 2015, States with Major Impact
[State; Number of Returns (millions); Percent of Returns with Deduction; Amount of Deduction (dollars in billions); Average Dollar Amount Claimed; Percent of Amount Claimed; United States; 44.3; 100.0; $552.7; $12,471; 100.0% California; 6.1; 13.8; $112.6; $18,438; 20.4% New York; 3.3; 7.5; $73.6; $22,169; 13.3% New Jersey; 1.8; 4.1; $32.2; $17,850; 5.8% Illinois; 1.9; 4.3; $24.1; $12,524; 4.4% Massachusetts; 1.3; 2.8; $19.5; $15,572; 3.5% Connecticut; 0.7; 1.6; $14.3; $19,665; 2.6% District of Columbia; 0.1; 0.3; $2.3; $16,443; 0.4% Source: IRS, Statistics of Income Division, Historical Table 2, September 2017]
California, New York, New Jersey, and Illinois were the largest beneficiaries of the SALT deduction, with California residents representing more than one-fifth of the total SALT deductions claimed.
Daniel Cullinane CPA
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2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778