Well-off professionals in costly areas of the U.S., such as New York and California, are set to get a windfall from competing plans by Congressional Democrats to change the deduction limit for state and local taxes.
Americans with six-figure salaries and high property and state income tax bills will see the most noticeable effects from lifting the $10,000 SALT cap, according to an analysis by accounting firm Marcum conducted for Bloomberg News.
Democrats are deciding between at least two proposals to tweak the limit imposed by the 2017 tax law signed by former President Donald Trump.
The reconciliation bill under consideration by the House of Representatives would allow all taxpayers – including the superrich – to deduct up to $80,000 of SALT.
“This fix will put money back in the pockets of hardworking, middle-class families in our districts and help ensure that our local communities can continue making the investments that we need,” Representatives Tom Suozzi of New York and Mikie Sherrill and Josh Gottheimer of New Jersey said in a statement.
In the Senate, Vermont’s Bernie Sanders and New Jersey Senator Bob Menendez have proposed limiting the benefits of raising the SALT cap to non-wealthy households. Those earning less than a still-to-be-decided amount would still be eligible for an unlimited SALT deduction. A threshold of $400,000 was floated earlier this month, but Menendez said the income limit could be as much as $500,000.
The practical impact of each proposal would vary widely based on where a taxpayer lives, what they pay in property taxes and how many other deductions they claim, including for mortgage interest and charitable donations.
Middle-income taxpayers with substantial state and local tax bills could reap benefits from both plans. Marcum analyzed a married couple in the New York suburbs that earn $150,000, have a $400,000 mortgage and pay $10,000 in property taxes and $2,500 in charitable donations per year. Either approach would let them deduct their full SALT bill of almost $18,000, saving them $1,743 and lowering their overall tax rate by 1 percentage point.
For a couple earning $400,000, the benefits are much larger, both in dollars and as a share of income. Marcum assumed this couple, also in a New York suburb, would owe $25,000 in annual property taxes, deduct interest on a $750,000 mortgage and give $6,000 to charity each year. They would be able to deduct more than $50,000 in SALT expenses on their federal returns under both proposals, saving almost $12,000, or a 3-point drop in their overall tax rate.
A family with the same expenses but $600,000 in income, meanwhile, would also get a roughly 3-point tax cut, this time delivering $19,251 in savings. Those savings probably wouldn’t be available under the Senate proposal, assuming it phases out for earners at that level.