Will the SALT Tax Cap be Modified?

President Trump has mentioned that he’d consider changes to a cap on the federal deduction for State and Local Taxes (SALT), one of the most troublesome provisions of the 2017 Republican tax overhaul.

Trump commented to newspaper reporters that he is “open to talking about” revisions to the so-called SALT cap. This current cap limits state and local levies to $10,000 (including property taxes) that the taxpayer can deduct each year on their federal returns. The annual SALT cap runs through the end of 2025. The cap, at one time, was a key revenue raiser in the $1.5 trillion tax-code overhaul. This overhaul was key in reducing tax rates for businesses and individuals.

So what would an overhaul mean for individual taxpayers?

If the SALT Cap is increased above the $10,000 limit, it should have a positive impact for some taxpayers who pay more than $10,000 in SALT taxes.  By increasing the maximum SALT tax deductions, it should enable more taxpayers to exceed the standard deduction.  It’s important to realize that itemized deductions, including the SALT tax, are only beneficial to the extent that total itemized deductions exceed the standard deduction.

Not so simple – what about Alternative Minimum Tax (AMT)?

If you are a taxpayer from a state with high income and real estate taxes, in the past the Alternative Minimum Tax likely limited the benefit you got from deducting SALT taxes.  This was because the state and local taxes were added back to regular taxable income for AMT purposes; therefore the AMT tax was canceling out much of that SALT deduction for taxpayers in states with high SALT taxes.

The new tax law passed in 2017 changed the way AMT tax is calculated, and many taxpayers who used to pay the tax, are no longer required to pay it.  This was done by raising a part of the AMT calculation called the exemption amount.  If the law were changed to raise the cap on SALT taxes, it remains to be seen whether the AMT exemption amount will be restored to the amount before the 2017 tax law changes.

To look at it another way, there used to be a lot of taxpayers in taxes with high SALT taxes who got to deduct all those taxes as itemized deductions.   In many cases, the benefit of deducting those taxes was limited by the AMT.  If the SALT tax limit is raised or eliminated, it will mean many taxpayers who pay a lot of SALT taxes may once again be able to deduct those taxes as itemized deductions.  If there is no change to the AMT exemption amount, it will be an even bigger deal to those taxpayers because the AMT will be much less likely to limit the benefit of the SALT deduction.

Right now, our leaders in Washington haven’t said much about what they plan to do.  We’ll just have to wait and see how this debate plays out.

If you have questions regarding State & Local Taxes, please contact:

Rich Scott – rich.scott@kerberrose.com

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About KerberRose Certified Public Accountants

KerberRose provides accounting, audit, consulting, tax compliance, and quality assurance services. The Firm was founded in 1979 and specializes in providing business accounting services to a variety of niche industries, such as Agribusiness, Condominium & Homeowner Associations, Construction, Real Estate, Franchises, Government Entities, Healthcare, Manufacturing, Restaurants, and Not-for-Profit organizations. Offices are located throughout Northeast and North Central Wisconsin: Antigo, Clintonville, Fox Cities, Green Bay, Oshkosh, Rhinelander, Shawano, Sister Bay, Stevens Point and Wausau. The organization has also been named a Top 300 Firm by Inside Public Accounting in 2015, 2016, 2017, & 2018. KerberRose combines the expertise of a leading regional firm with the convenience, familiarity and passion of a local provider.

Rich Scott

About the Author

Rich Scott
Rich has more than twenty-five years of tax experience. He provides tax consulting services to closely–held family businesses in the construction, manufacturing, wholesale distribution, retail and professional service industries. He is a frequent speaker on various tax topics.

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