Taxes: What the SALT cap means for high-tax states
“A lot of changes are coming to taxes,” thanks to the overhaul Congress just passed, said Kathryn Vasel in CNN.com, and “one of the most controversial” hits some blue states particularly hard: a $10,000 cap on state and local tax (SALT) deductions. SALT deductions have long been “the main reason for itemizing” on your taxes, and 28 percent of all taxpayers claim them. Until now, there was no limit on the amount of state income and property taxes that residents of high-tax states, such as New Jersey, Illinois, and California, could deduct from their federal taxable income. But with the deduction now capped at $10,000, many taxpayers could soon face steeper bills; some 4.1 million Americans pay more than $10,000 annually in property taxes alone. For other residents of high-tax states, other changes in the tax legislation “may offset the loss.” For instance, the higher standard deduction of $12,000 for individuals and $24,000 for married couples filing jointly could make itemizing less financially beneficial.
That didn’t stop tens of thousands of people from lining up at tax offices across the country in the last week of December “to pay their 2018 property taxes early,” said Peter Jamison in The Washington Post. The tax bill specifically prohibited prepaying state income taxes but made no mention of property taxes, and local officials were “besieged” with questions from people hoping to get the deduction “before the cap took effect.” In affluent Fairfax County, Va., the tax office collected nearly $16 million in prepayments on the day after Christmas alone. But then the IRS announced that those filers’ efforts were largely for naught, and that taxpayers would get the deduction for prepayments only if their 2018 property tax bill had already been sent out—something most local governments haven’t yet done. Home prices in these areas “will take a hit,” said Jeff Andrews in Curbed.com. “SALT deductions are baked into the price of homes,” and capping them will “inherently lower the value” of houses in high-tax counties.
If you want to lower your state tax bill, think about diverting more income into “tax-deferred accounts” such as 401(k)s and IRAs, said Ryan Derousseau in Fortune.com. By the time you’re retired and “ready to start withdrawing and owing taxes on the money, you can move to the sandy beaches of a low-tax town.” Moving now to a low-tax state is another, albeit more drastic, option. Before you pack your bags, check to see how your state legislature is reacting to the ta x bill, said Patrick Clark in Bloomberg.com. The fear of losing affluent constituents is motivating some high-tax states to consider ideas that once seemed far-fetched, such as “replacing income tax with payroll tax” or reclassifying state tax payments as charitable donations. Local lawmakers know that circumventing the SALT cap “could be good politics in the blue states hit hardest by the change.”