Taxpayers are struggling to understand whether they’re coming out ahead or losing out under the new tax laws. But there’s one group that’s losing out to the tune of $323 billion: Taxpayers who live in high-tax states like New York and California.
Almost 11 million taxpayers are likely to feel the pinch of a new cap on deducting state and local taxes, also known as SALT deductions. Before President Donald Trump signed the Tax Cuts and Jobs Act into law, taxpayers could deduct all their state and local taxes from their federal returns. But the new law capped those deductions at $10,000 — a rule that was meant to find new revenue to pay for the law’s generous tax cuts to corporations and the wealthy.
That is now turning into a financial pinch for homeowners and taxpayers whose property taxes and state income taxes add up to more than $10,000. In an audit issued Tuesday, the Treasury Department estimated the SALT cap will likely impact 10.9 million taxpayers by examining how many 2017 returns claimed these deductions above that cap. Those taxpayers wouldn’t be able to deduct $323 billion in state and local taxes, Treasury said. Each year, about 153 million taxpayers file returns.
“The people who are in a high tax state like New York, California, Connecticut and New Jersey and so on are missing out because of the limitation on SALT tax deductions capped at $10,000,” said Harvey Bezozi, a CPA and the founder of YourFinancialWizard.com in Boca Raton, Florida.
Other tax law changes
To be sure, it doesn’t mean that all 11 million taxpayers hit by the SALT deduction cap will pay higher tax bills. In some cases, these taxpayers may offset the lower SALT deduction through other tax law changes, such as a higher standard deduction and lower tax brackets.
But those who are hit are likely to live in mostly Democratic-leaning states such as California and New York, where state income and property taxes tend to be higher than the national average. They’re also likely to be wealthier, according to the Tax Foundation. In 2016, almost 80 percent of the full SALT deduction had gone to Americans with incomes of more than $100,000, the Tax Foundation said. About 6.6 percent of the benefit went to taxpayers who earned less than $50,000, it added.
Several states — including New York and New Jersey — are challenging the SALT deduction cap in court, claiming the new tax law is unconstitutional because of federal overreach and the harm to some states and their residents.