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Financial Planning > Tax Planning > Tax Deductions

Who Will Be Hurt by Trump’s Plan to End State & Local Tax Deductions?

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Among the many changes proposed in President Donald Trump’s one-page tax plan released Thursday is the elimination of the federal deduction for state and local taxes, which includes both income and property taxes.

Taxpayers in high-tax states like New York and California who itemize their returns would be hit the hardest by the loss of the deduction, but their tax bill could also be offset by the cut in federal marginal income tax rates and increase in the standard personal deduction as well as other tax changes. The impact would vary based on income levels and other tax changes that could affect individual taxpayers.

“Depending on where you live, and how many deductions you take, you might end up paying more,” said Brad McMillan, chief investment officer of Commonwealth Financial Network.

In a statement about the Trump tax plan, seven organizations representing state and local governments at the federal level – the National Governors Association, National Association of Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association, National Conference of State Legislatures and The Council of State Governments – said, “eliminating or capping federal deductibility for state and local property, sales and income taxes would represent double taxation, as these taxes are mandatory payments for all taxpayers.”

The statement notes that the state and local tax deduction and tax-exempt municipal bonds are part of the original tax code in 1913 and “have long served to meet critical needs” and provide support for “vital investments in infrastructure, public safety and education … encourage economic growth and provide states and local governments with the flexibility to deliver essential services to our residents.”

The statement urged Congress to maintain the state and local deduction and the tax exemption for municipal bond interest.

Alan Cole, economist at the Tax Foundation, has produced a map and chart showing which states and localities benefit the most from the state and local tax deduction, based on the most recently available IRS data, as you can see below.

The deduction are larger in higher income, higher tax states where those taxpayers are “more likely to itemize,” according to Cole.

Amng the top 10 counties where taxpayers claimed state and local deductions in 2014, four were in California, three in New York State, two in New Jersey and one in Connecticut.

While those taxpayers deduct the most for state and local income taxes, all but one, New York, are the least dependent on federal funds, according to a recent WalletHub report.  New York State is home to three of the counties with the largest state and local tax deductions, but those localities are in the southern part of the state, commonly known as “downstate.” Upstate is another story, home to many depressed counties, more dependent on federal funds. 

States Least Dependent on Federal Funds 

Source: WalletHub

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