The Tax Cut and Job Creation Act of 2017 (Tax Act) no doubt will lighten the Federal Tax Burden for the majority. The USA Today reported on January 16th of this year that a study by Motley Fool found that 90 percent of people would likely have greater take-home pay in 2018, assuming the same income level and despite changes in deductible expenses lost on a federal level.
What about, however, the impact of the new limitation on the deductibility of State And Local Taxes (SALT) to reduce people’s federal income tax burden? Prior to the new tax act, an individual could deduct and thus reduce their federal income tax liability with the following deductions:
- state and local income taxes paid
- property taxes on their primary and secondary dwellings
- state and local retail sales taxes
SALT deductions are now limited to a combined $10,000 from all three sources. While some argue (incorrectly) that this is a political issue, the purpose was to make certain that across all states, despite their local and state and taxes, everyone earning the same income would have an identical federal income tax burden. This is akin to the Principle of Equalization in property taxes. That principle essentially states that properties of equal value within a taxing jurisdiction, regardless if they are under-assessed in value, should pay the same property tax.
Where may the new limits of SALT deductions likely have the greatest potential tax burden increase (ignoring any savings from the overall reduction in federal income tax rates)? The answer is in those states with the greatest SALT deductions prior to the Tax Act of 2017. People at the greatest potential risk are those that have the highest SALT deductions.
Which states had the greatest SALT deductions prior to the Tax Act? To answer this, the Tax Policy Center examined the 44.3 million returns having SALT deductions in 2015. The following shows the top-10 states with the greatest deductions for SALT in 2015. These are just averages, so many have more or less in every state.
Also included in the data from the Tax Policy Center was SALT stated as a percentage of Adjusted Gross Income – the greater the percentage, the more likely impact on potential federal income tax liability. The top-10 states with the greatest percentage of SALT taxes versus Adjusted Gross Income are in the following table.
To read the entire study by the Tax Policy Center for these deductions in 2015 (the latest available data) click https://www.taxpolicycenter.org/statistics/state-and-local-tax-deduction-state
Click here for the entire data series discussed.
While greater prior SALT deductions increases the potential impact on increased federal income taxes for some in the future, still necessary to consider is the reduction in tax rates on the federal level. A high prior SALT deduction does not guaranty an increase in federal tax liabilities.
Do not judge a book by its cover.