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 8:19 PM
Updated: Dec 20, 2017 8:19 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."

Minnesota Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 37624

Reported Deaths: 1503
CountyConfirmedDeaths
Hennepin12150785
Ramsey4805226
Stearns234519
Dakota228690
Anoka2180107
Nobles16626
Olmsted110115
Washington106940
Mower9452
Rice8357
Scott7004
Clay58538
Kandiyohi5701
Wright4565
Blue Earth4532
Todd4002
Carver3641
Lyon3092
Sherburne3075
Freeborn2900
Steele2281
Watonwan2160
Benton2143
St. Louis17715
Martin1635
Nicollet15912
Cottonwood1340
Goodhue1298
Winona12215
Crow Wing10612
Pine1030
Le Sueur981
Chisago971
Otter Tail931
McLeod880
Carlton850
Dodge840
Polk812
Chippewa781
Unassigned7637
Isanti720
Itasca6412
Waseca640
Douglas620
Meeker611
Morrison591
Murray580
Becker550
Faribault550
Jackson550
Sibley542
Pennington500
Pipestone371
Mille Lacs342
Renville322
Wabasha310
Brown302
Rock300
Yellow Medicine300
Beltrami290
Fillmore280
Houston250
Swift211
Norman200
Wilkin203
Redwood180
Cass152
Wadena150
Aitkin140
Big Stone140
Kanabec141
Koochiching141
Roseau130
Marshall120
Grant100
Lincoln100
Pope100
Mahnomen81
Clearwater70
Hubbard60
Lake60
Traverse50
Lac qui Parle40
Stevens40
Red Lake30
Kittson20
Cook10
Lake of the Woods00

Iowa Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 30975

Reported Deaths: 720
CountyConfirmedDeaths
Polk6464179
Woodbury321544
Black Hawk225258
Buena Vista171111
Johnson12648
Dallas126329
Linn126282
Marshall104319
Scott77810
Story7623
Pottawattamie72111
Wapello70630
Dubuque68322
Crawford6772
Muscatine62944
Sioux4630
Tama46229
Wright3801
Louisa36013
Jasper32317
Plymouth3165
Warren2731
Dickinson2642
Washington2369
Webster2132
Hamilton1871
Cerro Gordo1561
Boone1481
Clay1330
Clarke1312
Allamakee1284
Mahaska11517
Shelby1140
Clinton1071
Poweshiek1048
Carroll961
Pocahontas941
Bremer926
Franklin890
Des Moines882
Henry863
Emmet850
Cedar821
Taylor790
Monona760
Cherokee751
Floyd722
Hardin700
Marion700
Guthrie664
Benton651
Sac630
Jefferson590
Osceola590
Jones560
Humboldt541
Butler532
Harrison530
Lee532
Hancock510
Iowa510
Buchanan501
Monroe506
Calhoun492
Delaware491
Fayette480
Madison452
Clayton433
Lyon410
Palo Alto410
Davis391
Winneshiek380
Grundy370
Mitchell370
Mills360
Howard350
Kossuth340
Lucas304
Greene290
Jackson290
Chickasaw280
Winnebago280
Union270
Ida230
Cass220
Appanoose203
Keokuk201
Page200
Van Buren200
Worth190
Audubon161
Unassigned160
Adair150
Ringgold150
Decatur110
Montgomery102
Wayne100
Adams80
Fremont70
Rochester
Clear
73° wxIcon
Hi: 91° Lo: 68°
Feels Like: 73°
Mason City
Clear
69° wxIcon
Hi: 90° Lo: 68°
Feels Like: 69°
Albert Lea
Clear
72° wxIcon
Hi: 88° Lo: 69°
Feels Like: 72°
Austin
Clear
73° wxIcon
Hi: 90° Lo: 68°
Feels Like: 73°
Charles City
Clear
73° wxIcon
Hi: 88° Lo: 68°
Feels Like: 73°
Hot and sticky fourth of July weekend
KIMT Radar
KIMT Eye in the sky

Latest Video

Image

House fire under investigation in Rochester

Image

Fireworks calls over holiday weekend

Image

Prepping for the postseason in Iowa

Image

Sean's 6pm Weather 7/5

Image

Alternative baseball hopes to come to the Med City in 2021

Image

FOURTH OF JULY IN AUSTIN AND STEWARTVILLE

Image

Seans 6pm Weather 7/4

Image

Fans excited for Honkers return

Image

Honkers fall to St. Cloud in home opener

Image

Baseball returns to the Med City

Community Events