Source: RSM US LLP.   

ARTICLE

The state and local tax deduction limitation (SALT cap) has become a focal point of tax policy debate ahead of its scheduled sunset at the end of 2025. Lawmakers face a critical decision: Allow the cap to expire, modify it or make it permanent.

Because the SALT cap has significant implications for taxpayers, particularly those in high-tax states, it is already a bargaining chip for a new president and Congress that will consider broad tax legislation in 2025. Support for or opposition to the cap seems to cut across inter- and intra-party lines, which only adds to the uncertainty about its future.

The SALT cap’s future: Mapping the clues

The Tax Cuts and Jobs Act of 2017 (TCJA) limited the itemized deduction for state and local taxes to $10,000. Before that, there was no limit.

Since TCJA was enacted, the SALT cap has remained unchanged despite scrutiny among both major political parties. Looking ahead, the range of possibilities—from allowing the SALT cap to sunset to making it permanent to eliminating the deduction entirely—are too numerous and uncertain to detail each one here.

However, policymakers and political candidates have either introduced legislation or discussed proposals that offer clues to the eventual direction of the SALT cap.

  • Bills such as H.R. 7160 and H.R. 339 have been proposed to eliminate the so-called marriage penalty of the SALT cap. As enacted, the limitation cannot exceed $10,000, including those filing jointly. Married individuals filing separately are limited to a $5,000 deduction.
  • Another bill, H.R. 1326, would eliminate the SALT cap completely on single and married couples filing jointly who earn less than $400,000 a year, increase the limitation to $60,000 for taxpayers earning more than $400,000 a year, and provide a schedule to reduce the limitation until the deduction is fully phased-out for those that make $1 million or more.
  • A version of the Build Back Better Act, the predecessor to the Inflation Reduction Act (IRA) of 2022 (H.R. 5376, IRA), included an increase to the limitation to $80,000, as well as an extension through 2031. No changes to the limitation were ultimately included in the IRA.

SALT cap expiration: A prohibitive cost?

One consideration for policymakers remains the high cost of allowing the SALT cap to expire.

In late August 2024, the Committee for a Responsible Federal Budget estimated that the sunset of the SALT cap would cost $1.2 trillion of lost revenue from fiscal year 2026 through fiscal year 2035. Similarly, in 2023, the Tax Foundation estimated that making the deduction permanent for the 10-year period between 2024 and 2033 would generate about $1.2 trillion of revenue.

Although the Congressional Budget Office has not recently scored the SALT cap specifically, it has estimated an approximate $1.3 trillion decrease in deficits from extending the TCJA’s itemized deductions from fiscal year 2025 through 2034, but that scoring also included other deductions such as mortgage interest.

The tax policy crossroads: SALT cap

Even without precise scoring, eliminating or extending the SALT cap may substantially affect overall revenue, as well as contribute to narrower or broader tax policy platforms of the next president.

As of the date of this article, Vice President Kamala Harris had not specifically addressed any tax policy relating to amending or extending the SALT cap. Former President Donald Trump indicated support for allowing the deduction to expire, although he has advocated for extending other provisions of the TJCA.

What does this mean for you?

Below is a summary of the three potential outcomes with respect to the SALT cap, and potential strategies to consider.

Scenario 1: Lawmakers allow the SALT cap to expire on Dec. 31, 2025

Factor in SALT deductions when evaluating your investment structure and future acquisition plans. Also, be mindful of the timing of your tax payments. State, local and property taxes are deducted in the year paid, which can differ from the year assessed. Deferring the payment of certain state and local taxes until after the cap expires may be advantageous.

Scenario 2: Lawmakers modify the SALT cap

Stay alert to federal and state legislative developments regarding the SALT cap. Be prepared to recalculate your tax projections as details of the modifications become clear. Consider the impact of state pass-through entity (PTET) elections, including the state tax implications.

Scenario 3: Lawmakers make permanent the $10,000 SALT cap

Evaluate how the permanent cap affects your overall federal and state tax situation. Consider alternate strategies, such as PTET elections.

Stay informed and be ready to proactively address SALT cap changes

Even after the balance of power in the federal government in 2025 comes into focus, it may be difficult to identify the direction SALT cap policy is headed because members of the same party have disagreed on the issue. At least one thing is certain, though: The future of the SALT cap has far-reaching consequences for federal revenue, tax policy and taxpayers.

The complexities and nuances of the SALT deduction, as well as the potential for significant financial implications, necessitate proactive planning and timely adjustments. By staying informed and ready to adapt, you can better navigate the evolving tax landscape and optimize your tax situation.

This article was written by Mo Bell-Jacobs, Amber Waldman and originally appeared on 2024-10-15. Reprinted with permission from RSM US LLP.
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