The voices of Tax Policy Center's researchers and staff
The Tax Cuts and Jobs Act (TCJA) will reduce the number of itemizers by about 27 million in 2018, mostly because it will substantially increase the standard deduction. But about 3.5 million of those households will no longer itemize because of the TCJA’s new limits on the state and local tax (SALT) deduction, according to new estimates by the Tax Policy Center.
Limiting the SALT deduction will boost taxes by about $36 billion next year, an amount that will rise to more than $90 billion by 2024.
The TCJA will limit the SALT deduction to $10,000 and the limit is not indexed for inflation. Under current law, taxpayers may deduct from taxable income all their state and local property tax as well as either their income or sales taxes. High-income households will be the biggest losers from the SALT deduction cap. More than 96 percent of the tax increases would be paid by those in the top 20 percent of the income distribution (those making $150,000 or more in 2018), and more than half would hit those in the top one percent, who make more than $730,000.
However, only about 40 percent of those in the top 20 percent would pay higher taxes under the SALT limit. That’s because many—especially those making $200,000-$500,000—have already lost the benefit of the SALT deduction because they’ve been hit by the current law’s Alternative Minimum Tax.
Despite the SALT cap, keep in mind that high-income households generally will do very well under the TCJA, which cuts corporate and individual income tax rates, reduces taxes on many pass-through businesses such as partnerships, and scales back the AMT. TPC estimates that 90 percent of those in the top one percent would get a 2018 tax cut, averaging $62,000.
Still, those in the top one percent will pay an average of about $30,000 more due to the SALT limit than if SALT were fully deductible (assuming all other provisions of the TCJA remain in place). Only a handful of middle-income households will pay higher taxes as a result of the new SALT cap, averaging about $800.
The TPC did not break down the effects by state. However, residents of high-tax states, such as New York, California, and New Jersey, generally would face the biggest tax increases from the SALT limit.
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Michael Owen Baker/AP Photo