What might the proposed SALT changes mean for your next tax invoice?

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As negotiations on the Build Back Better Act (BBB) ​​forward, the state and local tax deduction, or SALT, has emerged as the latest intra-party bargaining chip in the Democrats’ efforts to approve the $ 1.75 trillion social spending package.

Specifically, Democrats in high state and local tax states like California, New York, and New Jersey are backing a proposal to increase the ceiling on state and local taxes that individuals can deduct from their federal income taxes from $ 10,000 to $ 10,000. 72,500.

The SALE deduction it’s a way for people, especially in states where income, sales, and property taxes are high, to avoid double-paying the taxes they’ve paid for services provided by states and localities – things like education, health care and transport. Prior to 2017, taxpayers detailing their returns could claim an unlimited dollar amount as a SALT deduction; subsequently, a Republican Congress passed the Tax Cuts and Jobs Act, or TCJA, which limits the eligible SALT deduction to $ 10,000 per year.

The imposition of that cap primarily affected high earnings in the blue states and allowed the government to raise more tax money, although at the time it was offset by large tax cuts in the Republican bill itself. Now, the push to raise the ceiling is a way to get more Democrats – particularly moderates and the aforementioned lawmakers from high-tax, high-earning states – aboard with the broader reconciliation bill.

But given that the current SALT cap aligns with the progressive general belief that higher earnings should pay more in taxes to fund investments like the BBB, democratic support to raise it can be confusing. Here’s why some Democrats want the SALT cap to be raised anyway, what it would mean for fiscal policy in the United States, and how it could affect regular American taxpayers:

How will a higher ceiling on the SALT deduction affect me?

If the changes to the SALT limit currently under discussion for the reconciliation bill are successful, whether or not they affect the bill depends on your income, where you live, and other details, such as ownership of the property.

Like Emily Stewart of Vox explained in April, people can choose to deduct some expenses from their taxable income.

As Stewart writes:

When people file taxes, they can deduct certain expenses to reduce taxable income. Many people simply take the “standard deduction” and cut a fixed amount. Others, on the other hand, choose to list their deductions, so they can steal things like charity deductions and medical bills. Generally, taxpayers choose which path will be most beneficial to them, for example, which will leave them with less income to tax.

The types of expenses that people can choose to deduct (income or sales tax, property tax, medical bills, and charitable donations, for example) will not change. The amount they are able to deduct due to those state and local taxes, however, might.

Just as 2017’s deduction limit impacted higher earnings – typically those who earn more than $ 100,000 – By effectively increasing the amount of annual income subject to federal taxes, an increase in the deduction limit would primarily benefit the higher earners themselves.

Additionally, higher-income workers are more likely to own property and therefore pay property taxes in their state and locality – another expense that people can choose to deduct from their taxable income.

According to Fiscal policy center, a joint project of the Urban Institute and the Brookings Institution, “Sixteen percent of registrants with income between $ 20,000 and $ 50,000 supported the SALT deduction in 2017, compared with 76% for registrants with income between $ 100,000 and $ 200,000 and over 90 percent of registrants with income above $ 200,000. “

High earnings in high-tax places – mainly blue states like California, New York, and New Jersey – are more likely to claim the SALT deduction to reduce their taxable income.

What are the specific changes proposed to SALT and who supports them?

In more basic terms, the proposed changes to the SALT deduction would increase the deduction limit from $ 10,000 to $ 72,500 per year, with the raised limit set to will expire on January 1, 2032.

According to the appeal, the new $ 72,500 cap would also be retroactive to the start of the year.

Lawmakers in favor of lifting the SALT deduction limit include Reps. Tom Suozzi (D-NY), Mikie Sherrill (D-NJ) and Josh Gottheimer (D-NJ) – all represent districts with many high-income individuals who pay high taxes. But even high-profile progressives, like Rep. Katie Porter (D-CA), are in favor – in fact, Porter, whose district in California had a median household income of $ 115,427 and an median property value of $ 794,400 in 2019, was a driving force behind the SALT limit increase.

In September, Porter defended his position on the Pod Save America podcast, arguing that keeping the current SALT limit or eliminating the deduction altogether would mean taxpayers would essentially pay some tax twice.

“No American with the same income level, the same earning power, the same salary, should have to pay more federal taxes just for where they live,” Porter said.

The SALT deduction described above is the version currently in effect in the most recent Home version of the Build Back Better Act, but that’s not the only plan. Sens. Bernie Sanders (I-VT) and Bob Menendez (D-NJ) have proposed a alternative plan – one that would keep the $ 10,000 cap in place, but only for taxpayers earning $ 400,000 to $ 550,000, according to the Joint Committee on Taxation’s non-partisan estimates. For taxpayers who earn less, there would be no SALT limit.

Senate Majority Leader Chuck Schumer proposed his idea, which would completely eliminate the SALT limit for the next five years and return to the $ 10,000 limit in 2026.

When did the SALE deduction change?

The SALT deduction was part of fiscal policy since before the federal income tax was created in 1913, and apart from some minor changes in the 60s and 70s, had not changed significantly until the 2017 review through the TCJA.

Considered that the amendments to the law of 1964 and 1978 what could be inferred, the TCJA has addressed how much it could be deducted.

Taken on its own, the 2017 cap, which was supposed to expire in 2025, looks like a progressive fiscal policy. But has been enacted by a Republican Congress to make up for a revenue shortfall caused by the cut in the marginal tax rate for higher earnings from 39.6 percent to 37 percent and corporate tax rates from 35% to 21% – hence the part of the bill on “tax cuts”. Overall, according to the Fiscal policy center, the Congressional Budget Office predicted at the time that Republican tax law would increase the federal deficit by nearly $ 1.9 trillion in its first decade.

Will the SALT changes actually become law?

The changes proposed by SALT – both the current version of the House and the alternative plans of the Senate – are still not a sure thing at all. Under the BBB, increasing the current SALT limit still has a long way to go.

In particular, as Vox’s Li Zhou explained on Friday, the reconciliation bill has yet to go through the House – which at this point probably won’t happen until mid-November – before moving on to the Senate and then back to the House for the (eventual) final pass. In both chambers, unified Democratic support is key: with a majority of 50 seats in the Senate decided by Vice President Kamala Harris in her role as Senate Speaker, the party has no room for error in one chamber and only a few more votes in the strictly divided house.

SALT, however, could help with this. Eliminating the current SALT cap was a key priority for Gottheimer, who leads the small group of moderate House Democrats who have so far resisted the BBB vote. without a Congressional Budget Office score, and the inclusion of SALT changes in the House bill could prove important in strengthening its support for reconciliation.

“We are confident with this [SALT relief] agreement, we can move forward on this crucial package and will continue to work to ensure that this tax cut is converted into law to provide this relief to our constituents as soon as possible, “Gotteimer said in a statement. Friday statement with Sherrill and Suozzi.

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