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Financial Planning > Tax Planning > Tax Loss Harvesting

Debate Swirls on Benefits of Repealing SALT Deduction Cap

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Lawmakers continue to debate the benefits to middle-class taxpayers of repealing the $10,000 cap on the state and local tax, or SALT, deduction.

Reps. Nita Lowey, D-N.Y., and Peter King, R-N.Y., floated legislation last January, The Securing Access to Lower Taxes by Ensuring Deductibility Act, or SALT Deductibility Act, to repeal the limit on the SALT deduction, thereby “providing tax relief for the millions of families who rely on the deduction.”

Lowey and King argued at the time that their bill restores the SALT deduction, which was “significantly curtailed” by the sweeping tax overhaul passed in 2017.

“Millions of taxpayers in high-taxed states like New York depend on the state and local tax deduction to help pay their expenses and care for their families,” Lowey said in introducing the bill. “By effectively eliminating this deduction, the new federal tax law unfairly punishes families living in states that send more money to the federal government than we get back in federal investments.”

The SALT deduction was “a major source of tax fairness for high-taxed states like New York, where 35% of taxpayers deduct an average of more than $22,000 every year,” Lowey said.

The 2017 tax law caps the SALT deduction at $10,000, “effectively raising taxes on millions of middle-class Americans who depend on the deduction,” Lowey argued.

Newly released analysis by the Tax Foundation in Washington, a conservative-leaning research group, finds that removing the SALT deduction cap would cost $673 billion during the 2019-’28 budget window and that most of the benefits would go to the top 5% of households.

“We estimate that eliminating the SALT deduction cap would have no impact on taxpayers in the bottom two income quintiles and a negligible impact on taxpayers in the third and fourth quintiles,” writes Kyle Pomerleau, the Tax Foundation’s director of quantitative analysis.

“These taxpayers currently benefit from the new large standard deduction. However, taxpayers in the top 5 and 1% of income earners would see an increase in after-tax income of 1.25% and 2.79% respectively.”

John Buhl, spokesman for the Tax Foundation, told ThinkAdvisor on Tuesday that there is “no ‘pay for’ attached” to the Lowey-King bill. “By contrast, near the end of the last Congress, there had been a call to increase the corporate tax rate from 21% to 25% to fully restore the SALT deduction.”

Buhl anticipates the idea of “restoring the cap” will be floated in various measures during the 116th Congress, “but tied to other proposals to offset some of the revenue loss,” with the Lowey bill as probably just a starting point or placeholder.

New analysis by the Tax Policy Center, a liberal-leaning research group, argues that “only about 9% of households would benefit” from repeal of the SALT deduction cap, “and more than 96% of the tax cut would go to the highest-income 20% of households.”

The top 1% of households, those making $755,000 or more, would receive more than 56% of the tax cut, writes senior fellow Howard Gleckman in the Tax Policy analysis.

The group estimated repeal would reduce federal tax revenues by $620 billion between 2018 and 2028.

TPC found about 45% of households in the top 20% of the income distribution (who make $153,000 or more) would get a tax cut if the SALT cap is repealed, as would more than 9 of every 10 households in the top 1%.

“By contrast, only about 3% of middle-income households (who make between $49,000 and $86,000) would pay less in taxes than if the SALT deduction cap is retained,” Gleckman states.

Repealing the SALT deduction cap “would cut taxes by an average of about $370, but that’s largely because so many households would get no benefit at all,” Gleckman continues. “Among all those whose taxes are reduced, the average tax cut would be about $4,100.”

For all middle-income taxpayers, the average tax cut would be $10.

States the TPC analysis: “Those in the top 1% would pay an average of $31,000, or 2% of after-tax income, less. Among those who get a tax cut, middle-income households would pay an average of $360 less while those in the top 1% would pay an average of about $34,000 less.”

— Check out How Advisors on Each Coast Help Clients Navigate New Tax Code on ThinkAdvisor.


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