SALT legislation

As Republican lawmakers work on a tax bill, they will have to tackle a key sticking point:

The popular state and local tax deduction that is taken by itemizers on Schedule A of the 1040.

There’s now a $10,000 cap on SALT write-offs. Prior to 2018, the deduction was generally unlimited for individuals, except for people who owed the AMT...alternative minimum tax. The Tax Cuts and Jobs Act enacted the $10,000 limit on SALT deductions. The cap ends after 2025. If nothing is done, filers could then deduct SALT as they did before 2018.

House GOPers from high-tax states want to hike the $10,000 cap or to end it. And they have the ears of their congressional leaders and President Trump. The president has called for increasing the cap, likely because he needs the votes of these GOP House members to pass tax legislation. With a one- or two-person majority in the lower chamber of Congress, Republicans cannot afford to lose many votes. The group of GOPers who support lifting the cap might be small, but they’re mighty. They can wield lots of power and affect what goes in or stays out of any tax bill.

But lifting the cap would cost lots of revenue and mainly benefit the wealthy. Most experts think at the end of the day the SALT cap won’t be fully repealed, despite repeated calls by the bipartisan House SALT Caucus to do exactly that. But it could be higher. Let’s look at ideas already on the table: Double the cap to $20,000 for couples filing a joint return. Triple it to $30,000 for joint filers... $15,000 for others. Greatly hike it to $200,000 for joint filers...$100,000 for others.

Other options are a bit complex, involving more than just hiking the cap. For example, one alternative would let the $10,000 cap expire at the end of 2025, and then let filers deduct only property taxes, but not state and local income taxes. Another idea is to fully eliminate the SALT deduction for business taxpayers.

When analyzing the SALT write-off, there are two other things to consider: First, the dreaded AMT. Prior to 2018, many upper-income individuals who were subject to AMT didn’t get a tax benefit from SALT write-offs. That’s because in figuring alternative minimum taxable income, you have to add back SALT deductions taken on Schedule A. The 2017 Tax Cuts and Jobs Act defanged much of AMT, resulting in far fewer taxpayers paying AMT now as compared with pre-2018 years. But, similar to the $10,000 SALT cap, the AMT easings lapse at the end of this year. And we don’t know exactly how Congress will handle the expiring AMT changes.

Second, most states offer business owner workarounds, in which partnerships and other pass-through entities can elect to pay an entity-level state income tax instead of having the owners pay state tax on income that is passed through to them. The owners then get a state tax break for their pro-rata share of tax paid by the firm. When an election is made, state income tax payments shift from the business owners, who are subject to the $10,000 SALT cap, to the pass-through entities, which are not.