GOP Lawmakers Demand SALT Deduction Cap Increase: Tax Letter

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GOP House members from high-tax states are giving their colleagues fits. They continue to demand an increase in the $10,000 SALT deduction cap. 

Since 2018, the federal tax deduction for state and local taxes taken by individuals on Schedule A of the 1040 has been capped at $10,000. Several Republicans from New York and California have been holding up full House votes on tax bills approved by the House Ways and Means Committee. These naysayers are clamoring for relief from the $10,000 limitation on SALT deductions. 

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Though this group isn’t large, it doesn't need to be. That’s because the Republicans' small majority in the House gives it leverage. Ideally, the group wants the $10,000 cap removed. But they could be OK with a higher cap, depending on the amount. Note that the $10,000 limit on SALT deductions expires automatically after 2025.  

Apparently, the group has the ear of new House Speaker Mike Johnson (R-LA), who promised these high-tax-state members that any major federal tax package that comes to the House for a vote will include an easing of the SALT limitation.  

State Workarounds

And there's more on the topic of SALT deductions. Since the $10,000 limit on the SALT deduction was first enacted as part of former president Donald Trump's 2017 tax reform law, states have come up with an innovative solution to give taxpayers who are members in LLCs and partnerships a way to avert the cap. Thirty-six states offer business owners workarounds for the SALT cap, including seven this year. And that’s costing the federal government a bundle — $10-$15 billion a year, or even more, according to a nonpartisan tax think tank. 

Under the state workarounds, partnerships, LLCs and other pass-through entities can elect to pay an entity-level state income tax instead of having the owners pay state tax on income that is passed through to them. The owners then get a state tax break for their pro rata share of tax paid by the firm. When an election is made, state income tax payments shift from the business owners, who are subject to the federal SALT cap, to the pass-through entities, which are not. The rules vary from state to state, including for how and when to make the election.

As a result of these state workarounds, the SALT cap, which was a key revenue raiser in the 2017 tax law, is generating only about 85% of its originally projected revenue.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.