Democratic Representatives Looking to Raise the SALT Deduction Cap to $80K. How This Affects Your Tax Bill?
The House Democrats’ $1.75 trillion spending bill raises the ceiling on the federal deduction for state and local taxes, known as SALT, to $80,000 per year through 2030, up from the current limit of $50,000.
However, according to experts, many filers are unaware of the potential impact of the SALT shift on their bottom line.
As certified financial adviser Matthew Benson, owner of Sonmore Financial in Chandler, Arizona, explained, “The SALT cap rise will have the greatest impact on high-income-tax states such as New York, California, and New Jersey.”
Filers remove from their adjusted gross income the greater of the standard or itemized deductions in order to arrive at taxable income, which is the number used to determine their tax payment.
For 2021, the standard deductions are $12,550 for single filers and $25,100 for married couples filing jointly, which means that if a taxpayer’s write-offs — such as SALT, medical expenses, charitable contributions, mortgage interest, and other items — fall below those thresholds, they will not be able to itemize.
Furthermore, after the passage of the Tax Cuts and Jobs Act of 2017, filers who itemize deductions can no longer deduct more than $10,000 for state and local taxes, boosting levies on filers who live in states with high income and property taxes.
Although the measure proposed by the House Democrats temporarily raises the ceiling to $80,000, it will allow eligible filers to decrease their taxable income even further.
Because most filers do not currently exceed the standard deduction, Benson believes that increasing the number of persons who itemize will encourage more people to do so again in high-income states.
However, the amount of money saved as a result of the increased limit is determined by how much the new limit reduces someone’s taxable income.
“I believe the most straightforward way to convey [the savings] is essentially your marginal rate multiplied by the difference in taxable income,” said Evan Beach, a certified financial planner and director of asset advice at Campbell Wealth Management in Alexandria, Virginia.
Using the example of $10,000 in taxable income and a marginal tax rate of 22 percent, there will be a savings of $2,200, according to the tax expert.
Possibility for tax-planning
Increasing the deduction cap for state and local taxes, if it is passed, may also open up planning opportunities for those who fall into a “tax valley” with reduced taxable income through 2030, according to Beach.
For example, a person with a lower income may want to sell valued assets in taxable accounts sooner rather than later in order to minimize their capital gains tax liability, according to him.
Alternatively, they can perform so-called Roth conversions, which involve transferring pre-tax money to after-tax Roth individual retirement accounts, while also paying levies now in order to save for the future.
As Beach noted, it’s similar to strolling into a store and discovering that coffee is on sale for the next week. Some may decide to purchase more because they are aware of the 20 percent discount.
The man explained that he wanted to pay his taxes now, at the lower rate, before the rates went back up in the future.
The future of Build Back Better, on the other hand, is still up in the air. In order to avoid Republican pushback during the reconciliation process, they will need support from all 50 Democratic Senators in order to pass the bill.