AMT and Pass-Throughs Add Complex Layers to 2025 SALT Tax Planning

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As Republican lawmakers in Washington, D.C., work on a tax bill, they will have to tackle multiple sticking points. One of the thorniest hurdles for the bill is how to handle the popular state and local tax (SALT) deduction that is claimed by individuals who itemize on Schedule A of Form 1040.

There is currently a $10,000 cap on SALT deductions. Filers can deduct on Schedule A any combination of state and local property taxes, and income or sales taxes, up to a $10,000 limit. Married couples who file separate returns can each deduct up to $5,000. Prior to 2018, the SALT write-off was generally unlimited for individuals, except for people who owed the alternative minimum tax. The 2017 Tax Cuts and Jobs Act (TCJA) enacted the $10,000 limit on SALT deductions.

As with many of the tax provisions affecting individuals in the TCJA, the $10,000 SALT deduction cap is temporary and expires after 2025. If nothing is done, filers could then deduct SALT on Schedule A of their Form 1040 as they did before 2018.

House Republicans from high-tax states, such as New York, New Jersey and California, want to increase the current $10,000 SALT deduction cap or eliminate the cap altogether. And they have the ear of their congressional leaders and President Trump.

The president has called for raising the cap both on the campaign trail and while in office, likely because he needs the votes of these Republican House members to pass tax legislation. With a very slim majority (maybe even only a one- or two-person majority at times) in the lower chamber of Congress, Republicans cannot afford to lose many votes. The group of House GOP-ers who support lifting the SALT deduction cap might be small, but they are mighty. They can wield lots of power and affect what goes in or stays out of any tax bill.

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Possible changes to the SALT deduction

Most experts think that at the end of the day, the $10,000 SALT deduction cap won't be fully repealed, despite repeated calls by the bipartisan House SALT caucus to do exactly that. But the cap could be higher or other changes could be made to it. Here are some options that are already on the table:

• Double the SALT deduction cap to $20,000 for couples filing a joint return (the cap would stay at $10,000 for other filers).
• Triple the SALT deduction cap to $30,000 for couples filing a joint return and increase it to $15,000 for other filers.
• Greatly increase the SALT deduction cap to $200,000 for couples filing a joint return and to $100,000 for other filers.
• Let the $10,000 cap expire at the end of 2025, but then let filers deduct only property taxes, and not state and local income or sales taxes.
• Fully eliminate the SALT deduction for business taxpayers, such as C corporations.

SALT deduction wrinkles

Complexities abound when analyzing the SALT deduction. Let's look at four things to consider.

1. Cost

Increasing the $10,000 SALT deduction cap or getting rid of it altogether would cost the government a lot of revenue that Trump and Congress would want to use for other tax cuts. It's estimated that eliminating the $10,000 cap would cost the government $1.2 trillion over 10 years.

2. Benefit to upper-income taxpayers

Lifting the $10,000 SALT deduction cap would mainly benefit upper-income taxpayers. According to the nonpartisan Tax Policy Center, taxpayers "making $430,000 or more would enjoy nearly three-quarters of the benefit" of full repeal of the SALT cap.

3. AMT

Third is the dreaded alternative minimum tax (AMT). AMT is due to the extent it exceeds regular federal income tax liability. Prior to 2018, many upper-income individuals who were subject to AMT did not get a tax benefit from SALT write-offs. That's because in figuring alternative minimum taxable income, taxpayers have to add back in SALT deductions taken on Schedule A. The 2017 TCJA defanged much of AMT, resulting in far fewer taxpayers paying AMT now, as compared with pre-2018 years. But similar to the $10,000 SALT deduction cap, the AMT easings lapse at the end of this year. And we don't know how Congress will handle the expiring AMT changes.

4. Pass-through entities

Fourth, most states offer workarounds around the SALT deduction cap to owners of pass-through entities, such as partnerships and LLCs. Under these state workarounds, pass-throughs can elect to pay an entity-level state income tax instead of having the individual 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 the tax paid by the firm. When such an election is made, state income tax payments shift from the business owners, who are subject to the $10,000 SALT deduction cap, to the pass-through entities, which are not.

As a result of these state workarounds, the SALT deduction cap, which was a key revenue raiser in the 2017 TCJA, is generating only about 85% of its originally projected revenue. Unless the SALT deduction cap is fully repealed, expect that these state workarounds will continue to exist.

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.

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