Lawmakers from both parties in such high-tax states as New York, New Jersey and California have been trying to repeal the $10,000 cap on deductions for state and local taxes, or SALT, as many taxpayers in these states can now write off only a fraction of their previous deductions.
Some contend that the SALT cap was intended to broaden the individual income tax base and partially fund ostensibly popular cuts in tax rates. Critics of repeal claim it would reduce federal revenue and benefit the wealthiest income earners; others say that the deduction was a major source of tax fairness for high-taxed states.
Some in Congress have called the cap a “callous” move to punish those in high-tax states. In a seemingly rare conciliatory gesture, the president has said he’s open to talking about changes to the SALT cap. Barry Horowitz, partner and team leader of state and local tax in the New York office of accounting firm Withum Smith+Brown, doesn’t believe the president will want the SALT cap repealed “since this pays for much of the tax cuts of [reform].
“Other revenue would need to be found if the SALT deduction is restored,” he said. “There will be a continued flight of high-net-worth earners and taxpayers to low-tax states.”
According to a recent survey of its members by the New Jersey Society of CPAs, most tax preparers in the state expect that the new SALT-deduction cap will raise taxes for clients earning less than $200,000 a year. A third of CPAs polled also said the cap “definitely” influences advice to clients on moving from New Jersey.
For many clients, the SALT-deduction cap combines with taxes already paid, evaporation of miscellaneous itemized deductions and mortgage interest not exceeding the standard deductions to produce surprise tax bills. The SALT cap has been devastating to the upper-middle class in such high-income tax states as California, New York, New Jersey and Connecticut and in high-property-tax states such as Texas, said Susan Carlisle, a CPA at Carlisle Dorafshani Wohl and Associates in Los Angeles. Other states with income tax rates of 7 percent or more include Oregon, Iowa, Minnesota, Maryland, Nebraska and South Carolina.
“It will soon impact the real estate markets in those states as people realize that their expensive homes are now a whole lot less affordable than they have been,” Carlisle said. “Some of my clients have been so shocked. I don’t hear from them for days after I write them the ‘I’m sorry to inform you’ email.”
“Talk of leaving California for Nevada, Florida or other states is more frequent,” said Daniel Morris, a senior partner at Morris + D’Angelo CPAs in San Jose, Calif.
“There is clearly frustration, but when looked at holistically, it is less burdensome for the super high-net-worth," Morris said. “People who make say between $250,000 and $500,000 will feel the pinch more, as they typically have leveraged housing, wages, high withholdings, property taxes and other expenses.”
With larger standardized deductions, the value of SALT deductions has actually declined, Morris pointed out. “High-tax areas frequently have high-income earners as well,” he added. “So should the tax code subsidize high-income people and their housing choices? This is a policy question that has been embedded in our tax codes since at least 1986, when restrictions and reductions were placed on certain deductions, accelerated when mortgage interest was limited and then further limited again in 2017.”