When filing taxes, Americans can claim a standard deduction or itemize certain expenses to lessen their taxable income. The standard deduction is a fixed amount that differs depending on whether someone is filing as an individual or as a married couple. The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction until 2025.
The act also capped the amount of state and local taxes that filers could use in itemized deductions at $10,000. The 117th Congress is currently debating whether this state and local tax deduction cap should be repealed or increased. Here’s how Americans are using this deduction.
What is the State and Local Tax (SALT) deduction?
This limit on state and local tax is often abbreviated to the SALT deduction cap and was temporarily set at $10,000 for single and married filers and $5,000 for married couples filing separately. Income taxes, sales taxes, personal property taxes, and certain real property taxes are eligible for the SALT deduction[1].
What does the SALT deduction cap do?
The pre-cap SALT deduction allowed people to deduct some state and local taxes to offset federal tax payment, effectively subsidizing state and local taxes for taxpayers. Capping the deduction in 2017 reduced the benefit for people who went over the $10,000 limit in previous tax filings. Conversely, it also provides the federal government with more revenue.
For example, suppose states increase taxes for items that qualify for a deduction. In that case, it will increase the amount of SALT-eligible payments a person can claim, which the federal government accepts as a deduction. Once a taxpayer reaches the cap, they must pay the difference in its entirety.
Both the increased standard deduction and the SALT cap reduced the number of returns that used itemized state and local tax deductions. About 25.6 million fewer tax returns used the SALT deduction the year after the cap was put in place.
Higher-tax states such as California, New York, New Jersey, and Pennsylvania had the steepest decreases in SALT deductions. For example, California taxpayers filed $130 billion in state and local tax deductions during the 2017 tax year. In 2018, they claimed $83 billion. In New York, SALT deductions fell by almost half, from $81 billion in 2017 to $42 billion in 2018.
How does it affect different income groups?
The SALT deduction cap affects higher-income taxpayers more than lower-income taxpayers. Higher-income taxpayers pay more state and local taxes such as income, sales, and property taxes, according to the Congressional Research Service. Also, taxpayers with higher incomes pay higher marginal tax rates so each dollar deducted results in greater savings.
The combination of the increased standard deduction and the SALT cap led to fewer people using the SALT deduction. It also meant that the SALT deduction was less useful for taxpayers with lower incomes. Prior to the cap, about 78% of the deductions came from incomes greater than $100,000, according to data from the Internal Revenue Service. After the cap, about 85% of SALT deductions were from that group.
While wealthier taxpayers were more likely to use the SALT deduction after the cap, it reduced how much they saved. In 2017, filers claimed $619 billion in SALT deductions, with $485 billion claimed by those making $100,000 or more. After the SALT deduction cap, filers claimed $321 billion in SALT deductions, while $272 billion went to people with incomes higher than $100,000.
[1] Real property taxes refer to taxes on land and the building attached to it. Personal property taxes are taxes on property not attached to land, like equipment and furniture.
