Under the tax legislation passed in 2017, Internal Revenue Code Section 164 limits the deduction for state and local income, property, and sales taxes (SALT) at $10,000. U.S. Representative Kevin Brady of Texas, the Chair of the House Ways and Means Committee commented that the change was being made to bring about tax relief to middle income families, but it also will help to pay for lower corporate rates that the bill’s sponsors contend will spur the economy and job creation.[1]
The cap is a drastic reduction from the previous rule that permitted all property taxes and all state and local income or sales taxes to be itemized. Again, as a result of the new law, any tax payment above the cap is no longer deductible on personal income taxes.
The $10,000 cap was one of the most controversial parts of the GOP tax plan.[2] It was designed as part of the Republican effort to significantly reduce the amount of state and local taxes Americans are able to deduct on their federal income taxes.[3] The final GOP plan ratcheted down the unlimited SALT deduction to just $10,000—with no further break for married couples. Originally, the House wanted to restrict the $10,000 deduction to only property taxes, but the final bill allows any state and local taxes to be deducted… property, income, or sales taxes.
Analysts see this as a big impact to blue states such as New York, Connecticut, and California. And there are concerns it could result in falling property values in high-tax cities with less money for public schools and road repairs.[4] Also in some of these blue states, $10,000 doesn’t come close to covering their combined property and income tax bills.
However, since the new law didn’t limit charitable deductions, some state governments are exploring creative workarounds for this year and beyond. California Democrats are discussing a bold scheme to end-run the new federal cap by allowing their citizens to donate the money to the state’s coffers and deduct the entire sum from their federal taxes.[5] And New York is looking at replacing state income taxes with payroll taxes.[6] Other states may follow suit.[7]
Although the Texas legislature hasn’t seriously considered such a measure, Texas Governor Greg Abbott has proposed a plan to give Texans some property tax relief. Abbott wants to put a 2.5% cap on revenue growth from property taxes and require two-thirds of voters to approve raising that cap.[8] In addition, there would be limited reasons for collecting revenue beyond that cap, such as funding raises for teachers and law enforcers.[9]
For more information on this and other tax matters, consult the IRS or a qualified tax professional.
[1] Herb Jackson, Tax plan caps property deduction at $10,000, puts new limit on mortgage deduction, USA Today (November 2, 2017). Retrieved at https://www.usatoday.com/story/news/politics/2017/11/02/tax-plan-caps-property-deduction-10-000-puts-new-limit-mortgage-deduction/823088001/.
[2] Heather Long, The final GOP tax bill is complete. Here’s what is in it, Washington Post (December 15, 2017). Retrieved at https://www.washingtonpost.com/news/wonk/wp/2017/12/15/the-final-gop-tax-bill-is-complete-heres-what-is-in-it/?noredirect=on&utm_term=.e5ffd85aeb77.
[3] Id.
[4] Id.
[5] Katy Murphy, Will California outmaneuver a new federal cap on tax deductions? San Jose Mercury News (January 2, 2018, updated, January 30, 2018). Retrieved at https://www.mercurynews.com/2018/01/02/will-california-outmaneuver-a-new-federal-cap-on-tax-deductions/.
[6] Samantha Sharf, How The New Tax Law Will Impact Your Housing Costs, Forbes (January 9, 2018). Retrieved at https://www.forbes.com/sites/samanthasharf/2018/01/09/what-in-the-final-tax-bill-could-impact-your-housing-costs/#46ca60ed2c08.
[7] Daniel Hemel, Why states may get away with creative income tax maneuvers, the conversation.com (January 7, 2018). Retrieved at theconversation.com/why-states-may-get-away-with-creative-income-tax-maneuvers-89677.
[8] Anna M. Tinsley, Here’s how Gov. Abbott would limit property tax increases, Star-Telegram (January 17, 2018). Retrieved at http://www.star-telegram.com/news/politics-government/election/article195238049.html#storylink=cpy.
[9] Id. The governor’s proposal would require local officials who oversee taxing districts to vote on whether to raise property appraisals. Abbott said this would make the process more transparent and hold “elected officials accountable to the voters.”
