The elections will have vast consequences on investors’ taxes, not least of which will likely be the expiration of the controversial SALT cap, said Alice Joe, Fidelity's vice president of federal government affairs.
Former President Donald Trump and Congress enacted the $10,000 cap on state and local tax deductions for married couples filing jointly in order to pay for his 2017 tax cuts. Individual taxpayers were limited to a $5,000 SALT deduction.
But in some counties in high-tax states such as California, New Jersey and New York, tax bills for state and local income taxes can be more than twice the limit, according to the Tax Foundation.
The controversial SALT cap is slated to sunset at the end of 2025, along with the rest of Trump’s 2017 tax reforms.
Lawmakers who have heard the howls of wealthier taxpayers pinched by the SALT cap for seven years now, probably lack the will to reinstate the cap, Joe said during a Fidelity webcast panel discussion last week on the upcoming elections.
“One complicating factor in the tax debate next year, if you look at the current composition of Congress today and most likely into the next Congress, is there’s probably not going to be enough support to keep the current state and local tax deduction, or SALT cap, at $10,000,” Joe said.
“The cap is definitely going to go up, although increasing the SALT cap means there’s going to be additional pressure to really find some revenue offsets, which means there’s going to be some things that are unrelated to the Tax Cuts and Job Act (TCJA) that may potentially lose their tax advantage,” Joe added.
If TCJA expires at the end of 2025, the SALT cap expires with it and taxpayers go back to the old tax rules, which include larger SALT deductions, a top income tax bracket of 39.6% (up from TCJA’s 36%) and a standard deduction that will be cut in half, making itemized deductions much more valuable, webcast speakers said.
While Democratic presidential nominee Kamala Harris has said she would let portions of TCJA expire, especially provisions that benefit those earning $400,000 or more annually, Trump, the Republican nominee, has said he would extend all of the TCJA provisions if elected.
“I’m sure you know our clients are really eager to not see the SALT cap extended," Ajay Sarkaria, regional vice president of advanced planning at Fidelity, told the webcast panel. "They’d like to see the expiration of that provision. What do you think that might mean for itemizing deductions after next year?”
If Congress lets TCJA expire and the standard deduction is halved, “a much greater population of people will be itemizing their deductions because it’s much easier to exceed [a standard deduction of] $13,000, than it is $24,000, which is the current deduction,” said Mark Menard, principal for private wealth services at Grant Thornton Advisors. "The magnitude of this deduction is so large for so many people in high tax states."
If the SALT cap is lifted, clients in high tax states and those who file in multiple states will be able to calculate their deduction based on “the aggregate of the state income taxes they’ve paid, plus the property tax they’ve deducted on their federal income tax return. As you can imagine this can be a very, very large deduction for high earners and people living in coastal and other states where you see high property taxes,” he said.
Senate Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries, both Democrats, have said letting the SALT tax cap expire is a major priority for them. Both party leaders represent constituencies in New York, which has been among the states where taxpayers have been hit hardest by the cap.
“We Democrats, as long as I’m leader, when state and local deductibility expires, it will be gone,” Schumer told reporters during the Democratic National Convention in Chicago.
Numerous attempts to erase the SALT cap, however, have failed to make it through Congress because a number of Republicans and even some Democrats and independents, such as progressive Sen. Bernie Sanders, don’t favor the tax break.