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Making sense of the new cap on state tax deductions

A lot of change is coming to taxes -- how much you'll pay and how you prepare them. Some people will pay more, some w...

Posted: Dec 20, 2017 9:19 PM
Updated: Dec 20, 2017 9:19 PM

A lot of change is coming to taxes -- how much you'll pay and how you prepare them. Some people will pay more, some will pay less. It depends on many factors.

One of the most controversial changes are those surrounding the deduction on state and local income taxes, a.k.a SALT. If you live in a state with high income and property taxes, you could lose out under the new tax plan.

We tried to make sense of it for you.

How does the SALT deduction work?

Under the new plan, taxpayers who itemize will be able to deduct their state individual income, sales and property taxes up to a limit of $10,000 in total starting in 2018.

Currently the deduction is unlimited. But filers have to choose to deduct either individual income taxes or sales taxes. For most people, deducting income taxes is more beneficial (unless of course you live in a no income tax state). In addition, property taxes were also entirely deductible.

While elements of the tax plan could help offset the lower threshold, like the nearly doubled standard deduction, expanded child care credits and lower individual tax rates, they won't necessarily be enough to make up for the loss of tens of thousands of dollars in SALT deductions that some filers would be losing.

Who claims the SALT?

Almost 90% of the SALT benefit goes to taxpayers with income higher than $100,000, according to the Tax Foundation.

Less than a third of taxpayers itemize deductions to begin with. Of those who do, nearly all of them take the SALT deduction.

High-income and high-tax states benefit the most from the deduction. Together, California and New York receive around one-third of the total value of the deduction, the Tax Foundation found. Filers in California, New York, New Jersey, Illinois, Texas, and Pennsylvania claim more than half of the value of the deduction.

The SALT deduction is usually the main reason for itemizing. More than 95% of itemizers claimed the deduction in 2014, while 28% of all taxpayers claimed it, reports the Tax Foundation.

"The SALT deduction is not only valuable to taxpayers, it also often pushes them out of standard deduction and they benefit from other deductions as well," said Lilian Faulhaber, associate professor of law at Georgetown University Law Center.

But fewer taxpayers are expected to itemized going forward since the new reform nearly doubles the standard deduction.

So who will pay more under the new rules?

Nationwide, 4.1 million Americans pay more than $10,000 in property taxes alone, according to ATTOM Data Solutions.

In some counties, more than half of residents pay at least that much. In Westchester County, a suburb of New York City, 73% of homeowners pay at least $10,000 in property tax, according to ATTOM. Almost 70% of homeowners in Luna, New Mexico, pay more than $10,000.

Once high-earning filers start adding in their income taxes, they could easily reach tens of thousands of dollars.

All but seven states have an individual income tax. California leads the pack with a top marginal income tax of 13.3%. Oregon, Minnesota, Iowa, New Jersey, Washington, D.C., and New York were all also in the top 10, according to Turbo Tax.

While some residents paying high property and income taxes will be losing out by not being able to fully deduct their expenses, other parts of the bill may offset the loss. The higher standard deduction will make itemizing no longer financially beneficial for some filers -- making the cap on the SALT moot.

And the largely lower tax rates will also reduce tax bills and make deductions less valuable. Taxpayers with children will see the child tax credit double to $2,000 per kid under age 17, which could also counteract the SALT limit.

But that won't help everyone.

"All income classes will see a reduction in tax liability and increase in after-tax income in 2018, though of course this is not true of every filer within each income class," said Jared Walczak, senior policy analyst at the Tax Foundation.

For example, a middle-class couple with no children who itemized last year won't see much change in their tax bill, and could potentially pay more, according to Damien Martin, a certified public accountant and national tax assistant director at BKD in Missouri. "This is the result of the loss of the personal exemptions and limitation of SALT deduction. Since they do not have children they would not benefit from the expanded child credit, said to have been designed to offset the loss of the exemptions."

A middle-class family that itemized in 2017 mostly due to their SALT deductions also won't experience much of a tax cut, if any he added.

Cash-strapped homeowners could also get pinched. "If you've been living on the edge and someone yanks away your ability to fully deduct your property taxes, that could mean that if you are used to deducting $20,000 and can only take $10,000, that is [more than $800] a month you are losing in deductions," said Bill Smith, managing director at CBIZ MHM National Tax Office.

People with multiple properties who are used to being able to fully deduct their property taxes could also feel the pinch, pointed out David Williams, chief tax officer at Intuit, maker of TurboTax.

Married couples get less of a benefit with the new SALT deduction since the limit is the same for both single and married filers.

"This is pretty clearly a marriage penalty," said Faulhaber from Georgetown. "If you have two unmarried taxpayers both paying $10,000 in SALT, they will get an aggregate $20,000 when they file, whereas if they get married they suddenly lose $10,000 in deductions."

Indiana Coronavirus Cases

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Reported Deaths: 13746
CountyCasesDeaths
Marion1030911775
Lake554681006
Allen41636691
St. Joseph36947564
Hamilton36527416
Elkhart29363459
Tippecanoe22862225
Vanderburgh22542400
Porter19331325
Johnson18405388
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Morgan6736141
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Ohio57811
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Ohio Coronavirus Cases

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Cases: 1107225

Reported Deaths: 20091
CountyCasesDeaths
Franklin1285061459
Cuyahoga1156322204
Hamilton812991245
Montgomery524951040
Summit48356999
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Butler38903603
Stark33297929
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Clermont20098252
Delaware18819135
Licking16649222
Fairfield16564204
Trumbull16527479
Medina15597270
Greene15256246
Clark14223306
Wood13281197
Portage13229214
Allen11903239
Richland11598211
Miami10837223
Wayne9116222
Columbiana9023230
Muskingum8889135
Pickaway8652122
Tuscarawas8639247
Marion8635138
Erie8052164
Ashtabula7139179
Hancock6996131
Ross6934161
Geauga6832150
Scioto6530104
Belmont6149174
Union583849
Lawrence5723102
Jefferson5669158
Huron5539122
Sandusky5437125
Darke5415129
Seneca5344126
Washington5308109
Athens523360
Auglaize501687
Mercer487285
Shelby476295
Knox4568112
Madison443765
Ashland435197
Putnam4334103
Fulton431871
Defiance431798
Crawford4033110
Brown401961
Logan387377
Preble3847103
Clinton378566
Ottawa372781
Highland359465
Williams347878
Champaign343858
Guernsey324253
Jackson317554
Perry297150
Morrow291340
Fayette285350
Hardin274865
Henry273267
Holmes2699101
Coshocton268459
Van Wert247264
Adams242956
Pike242735
Gallia240550
Wyandot234556
Hocking220162
Carroll196948
Paulding176342
Meigs148240
Monroe136144
Noble135839
Harrison113738
Morgan109624
Vinton85417
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