2019 Tax Filing Season (2018 Tax Year): The State and Local Tax Deduction

2019 Tax Filing Season (2018 Tax Year): The State and Local Tax Deduction

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Updated March 1, 2019
2019 Tax Filing Season (2018 Tax Year): The State and Local
Tax Deduction
Certain taxpayers can reduce their taxable income—and
P.L. 115-97 also increased the value of the standard
ultimately their federal income tax liability—by claiming
deduction, making it more appealing to taxpayers and
the deduction for state and local taxes (SALT) they have
thereby reducing the proportion of taxpayers that itemize
paid. Recent changes to the SALT deduction made by the
their deductions (and are eligible to claim the SALT
2017 tax revision, often referred to as the “Tax Cuts and
deduction). That change combined with the new restrictions
Jobs Act” (P.L. 115-97), have stimulated public discussion
on payments eligible for the SALT deduction is expected to
of the tax, its incidence, and potential responses from state
substantially reduce the number of SALT deduction claims
and local governments. This In Focus summarizes current
in tax years 2018 through 2025. The Joint Committee on
law and policy issues; a more extended discussion of the
Taxation (JCT) estimates that 16.6 million SALT deduction
SALT deduction can be found in CRS Report RL32781,
claims will be made for the 2018 tax year, well under half
Federal Deductibility of State and Local Taxes.
the number of claims reported by the IRS for tax year 2016
(43.2 million).
Summary of Current Law
Economic and Budgetary Impact of
Taxpayers may deduct state and local taxes paid from
Changes
income when calculating their federal income tax liability.
Individual taxpayers must itemize deductions (rather than
The SALT deduction effectively reduces the after-tax cost
use the standard deduction) on their income tax return to
of state and local public services. That reduction not only
claim the SALT deduction. The tax savings from the
benefits the taxpayers claiming the deduction (whose after-
deduction on state and local taxes paid is equal to the
tax incomes increase) but also state and local governments,
taxpayer’s marginal tax rate multiplied by the size of the
whose residents are willing to pay higher taxes than they
deduction, though may be limited by a cap on the total
would with no deduction. Restrictions on the SALT
amounts that can be deducted in certain years (see below).
deduction such as those enacted by P.L. 115-97 may
Income taxes, sales taxes (claimed in lieu of income taxes),
therefore provide state and local governments with
personal property taxes, and real property taxes are all
incentive to either reduce the taxes they levy (and
eligible to be claimed under the SALT deduction.
subsequently services they provide) or to modify their tax
structure to be more reliant on other taxes with federal tax
For tax years 2018 through 2025, SALT deduction claims
preferences.
for taxes paid not in the carrying on of a trade or business
may not exceed $10,000, and payments for foreign real
Amounts claimed from the SALT deduction are directly
property taxes are not eligible for the deduction. SALT
dependent upon taxable income. Since the federal income
deduction amounts for taxes paid in the carrying on of a
tax rate regime is progressive (where the rate of tax
trade or business are not limited. Under current law the cap
increases with income), a tax deduction, in contrast to a tax
on SALT deductions not related to the carrying on of a
credit, favors taxpayers in higher-income tax brackets
trade or business is scheduled to be eliminated after 2025,
because the value of benefits (aside from those restricted by
and foreign real property taxes are to be eligible for the
the cap on overall benefits) is directly proportional to a
deduction in those years.
taxpayer’s marginal income tax rate.
Comparison to Prior Law
Table 1 shows JCT’s forecasted number of SALT
deduction claimants and amounts claimed by income level
There was no limit to the deduction amounts available for
in tax year 2018. Under those projections households with
the SALT deduction before 2018. No distinction was made
incomes less than $75,000 will represent under 10% of the
for whether taxes were paid in the carrying on of a trade or
households claiming the SALT deduction in tax year 2018,
business, though business payments made toward sales and
and more than half of amounts claimed will be by
property taxes were removed from calculations of business
households with income exceeding $200,000.
economic income. Foreign real property taxes were eligible
for the SALT deduction before tax year 2018. The rate of
deductions available were reduced for taxpayers with
adjusted gross income above certain thresholds ($313,800
for married taxpayers filing jointly and $261,500 for single
filers in 2017).
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2019 Tax Filing Season (2018 Tax Year): The State and Local Tax Deduction
Table 1. Projected Distribution of SALT Deduction
The value of the state and local tax deduction (and the
Claims by Income Level, Tax Year 2018
effect of the changes enacted through P.L. 115-97) varies
(Returns in thousands, amounts in millions of dollars)
significantly across taxpayers, as income levels and other
factors that may influence federal rates of tax itemization
Returns
Amount
will also affect the relative benefit of the SALT deduction
Income
(thousands)
(millions)
to a given household. A February 2019 Treasury Inspector
General report estimated that 11 million taxpayers would
< $10K
5
<0.5
have been subject to the $10,000 cap had it been effective
$10K-$20K
40
5
for tax year 2017, though many of those households may
claim the larger standard deduction for the 2018 tax year.
$20K-$30K
104
22
$30K-$40K
211
61
Localities with higher state and local tax rates are also
likely to have more taxpayers whose SALT deductions are
$40K-$50K
410
123
limited by the $10,000 cap on nonbusiness tax payments.
$50K-$75K
1,800
823
Figure 1 shows the average SALT deduction claimed per
resident across select states in tax year 2016 (before the cap
$75K-$100K
2,281
1,716
took effect). The average taxpayer claiming a SALT
$100K-$200K
6,385
6,884
deduction in New York claimed a deduction that was more
than four times greater than the deduction claimed by a
> $200K
5,342
10,573
SALT claimant in Alaska. The $10,000 limitation is
therefore likely to affect a much greater share of taxpayers
Total
16,577
20,208
in New York than it will for Alaskan taxpayers.
Source: Joint Committee on Taxation report JCX-81-18.
Figure 1. Average Amount Deducted Per Claimant By State, Tax Year 2016

Source: Internal Revenue Service, SOI Historic Table 2.
Notes: Claims made before the $10,000 limitation on nonbusiness deductions took effect. States listed using their postal abbreviations.

Joseph S. Hughes, Research Assistant
IF11098
Grant A. Driessen, Analyst in Public Finance
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2019 Tax Filing Season (2018 Tax Year): The State and Local Tax Deduction

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