Important points
Limits on state and local tax (SALT) deductions on federal tax returns are set to expire in 2025, making them a potential election issue. The SALT deduction is popular in high-tax states such as California and New York, and most people receive higher benefits. Republican presidential candidate Donald Trump has indicated he intends to ease or eliminate restrictions, but Democratic presidential candidate Kamala Harris has not yet taken a position. One analysis shows that lifting the SALT deduction cap could increase the federal budget deficit by about $1.2 trillion.
The treatment of state and local tax deductions on federal tax returns has rapidly gained attention during this presidential campaign.
There are growing calls among politicians to eliminate limits on state and local tax (SALT) deductions. Meanwhile, taxpayers, especially those with high incomes, are waiting for further clarity.
What is a salt deduction and what’s all the fuss about?
Under current rules, the SALT deduction allows taxpayers to deduct up to $10,000 of local taxes paid from their income, reducing the total amount of federal income tax owed.
The $10,000 limit was established by the Tax Cuts and Jobs Act of 2017 and is scheduled to expire in 2025. Prior to the enactment of this law, there was no cap on the amount of SALT deductions that taxpayers could receive.
The Bipartisan Policy Center says the SALT deduction primarily benefits high-income earners and taxpayers in states with high local taxes. These taxpayers are discussing with their financial advisors how the outcome of this election may affect their tax liability.
Trump and Schumer call for lifting salt deduction limits
In a turn of events, Republican presidential candidate Donald Trump has signaled support for lifting the salt deduction limits put in place by his administration. At a recent rally in Long Island, New York, President Trump promised to restore the original uncapped salt deduction, which would “help residents of New York, Pennsylvania, New Jersey, and other high-cost states.” It will save you thousands of dollars.”
Prominent Democrats like New York Sen. Chuck Schumer support fully reinstating the SALT deduction, but Democratic presidential candidate Kamala Harris has not addressed the issue.
The Bipartisan Policy Center said some lawmakers in high-tax states such as California, New Jersey and New York are also likely to support eliminating the SALT deduction limit.
Elimination of SALT deduction limit could add $1 trillion to deficit
Eliminating the SALT deduction limit comes at a cost.
The Wharton School at the University of Pennsylvania estimates that removing the deduction limit could cost the federal government up to about $1.2 trillion in tax revenue over 10 years, further increasing pressure on the nation’s budget deficit.
“While it is unlikely that the policy will pass in its entirety, there may be lower-cost compromises, such as doubling the cap,” said Michael Pearce, principal deputy U.S. economist at Oxford Economics. .
