Explaining Changes to the State and Local Tax Deduction

The state and local tax (SALT) deduction allows taxpayers of high-tax states to deduct local tax payments on their federal tax returns. The tax plan signed by President Trump in 2017, called the Tax Cuts and Jobs Act, instituted a cap on the SALT deduction. Starting with the 2018 tax year, the maximum SALT deduction available was $10,000. Previously, there was no limit. We take a closer look at what the reduced deduction has meant for residents of high-tax states like California, New York and New Jersey. If you’re concerned about the impact of these changes, consider working with a financial advisor to manage the impact of taxes on your financial plan.

How State and Local Tax Deductions Work

Taxpayers who itemize their deductions (meaning they don’t take the standard deduction) can deduct what they’ve paid in certain state and local taxes. This SALT deduction includes property, income and sales taxes. More specifically, anyone who itemizes can deduct property taxes, but must choose between deducting their income taxes and sales taxes.

Most choose to deduct their income taxes because those payments generally exceed sales tax payments. Residents of states with high income taxes (California, New York, New Jersey and Maryland, to name a few) generally opt to deduct their state and local income taxes if they itemize. Residents of states with high sales taxes (Louisiana, Texas and others) and low or nonexistent income taxes generally opt to deduct their sales taxes if they itemize. However, property taxes and income taxes — not sales taxes — are the primary drivers of the SALT deduction.

Starting with the 2018 tax year, the maximum SALT deduction became $10,000. There was previously no limit. This has left some high-income filers with higher tax bills. The limit is also important to know because the 2024 standard deduction is $14,600 for single filers and $13,850 in 2023. So you need to have another $4,600 of itemized deductions for tax year 2024 and $3,850 for tax year 2023, beyond the SALT deduction, to itemize.

Since these tax matters can get complex, it’s useful to have guidance through tax season from an expert. Financial advisors can provide you with that guidance, and you can pair up with an advisor using SmartAsset’s matching tool.

Who Uses the SALT Deduction?

Not every American takes the state and local tax deduction. High-income filers are much more likely to itemize and therefore more likely to take the SALT deduction. The higher your income, the more valuable tax deductions are to you in general because you’re taxed at a higher rate.

With the deduction for state and local taxes, the federal government is effectively subsidizing high earners in high-productivity states and cities. (Any deduction the federal government offers is a subsidy.) As you might expect, wealthy residents of wealthy states are most likely to pay state and local taxes. They also tend to have the highest average SALT deductions. According to the Tax Foundation, people with incomes over $100,000 receive more than 91% of SALT deduction benefits.

Those who stand to gain from deducting their property taxes tend to be those who have expensive homes in prospering communities. Filers who deduct their state and local income taxes tend to be high earners in thriving states. States and cities with high income taxes also tend to be high-opportunity states like California and New York.

Why the SALT Deduction Matters

The deduction for state and local taxes has been around since 1913, when the U.S. first instituted the federal income tax. Defenders of the SALT deduction, such as the National Governors Association, point out that state and local income taxes, as well as real estate and sales taxes are mandatory. Taxpayers can’t get out of them. For advocates of the deduction, eliminating it would therefore constitute double taxation.

At the same time, the SALT deduction is one of the largest federal tax expenditures. Along with the mortgage interest deduction, the non-taxation of employer-sponsored health benefits and pension benefits, preferential tax rates on capital gains and the tax deferral of corporate profits earned abroad, the SALT deduction costs the federal government trillions in missed revenue opportunities. In fact, the Congressional Budget Office estimated that those and other tax expenditures added up to over 8% of GDP in 2017, the last tax year before SALT deductions were capped. That’s an amount equal to nearly half of all federal revenues in 2017.

Filers with incomes over $500,000 are greatly affected, but their loss in deductions could also be offset by the decrease of the top federal income tax rate, the doubling of the estate tax deduction and the cutting of the capital gains rate from 23.8% to 21%.

Lower-income individuals would feel less direct impact from reducing the SALT deduction, but they would still be affected indirectly. In response to the fact that people are paying more in federal taxes, those governments could choose to decrease their local tax rates. This would leave them with less to spend on government-sponsored programs and services.

How Reduced State and Local Tax Deduction Affects Taxpayers

New York, Connecticut, California, New Jersey and Massachusetts were the states (plus the District of Columbia) with the highest average deduction for state and local taxes before the 2017 legislation. Here’s how those deductions broke down according to the National Association of Realtors:

New York Taxpayers

Residents of New York took the highest average deduction for state and local taxes before the cap was put in place. In 2016, 35% of New York tax returns included a deduction for state and local taxes. The average size of those New York SALT deductions was $21,779. Residents of New York City pay particularly high tax rates due to the local income taxes assessed there. 

Connecticut Taxpayers

Connecticut residents took the second-highest average deduction for state and local taxes before the cap was instituted. The average size of Connecticut deductions for state and local taxes was $19,563 in 2016. Forty-two percent of Connecticut returns included a SALT deduction that year.

California Taxpayers

In 2016, 35% of California returns included a deduction for state and local taxes. The average California SALT deduction was $18,770.

New Jersey Taxpayers

New Jersey residents pay famously high income and property taxes. It’s no surprise, then, that 42% of New Jersey tax returns claimed a deduction for state and local taxes in 2016. The average amount of that deduction was $18,092.

D.C. Taxpayers

Because D.C. homes are so expensive, residents tend to pay a lot in property taxes. Income taxes in the district are high, too. It’s not surprising, therefore, that 40% of D.C. tax returns included deductions for state and local taxes. The average size of those deductions was $16,582.

Massachusetts Taxpayers

Thirty-seven percent of Massachusetts returns took deductions for state and local taxes. The average size of Massachusetts SALT deductions was $15,632. 

HIGHEST AVERAGE DEDUCTION FOR STATE AND LOCAL TAXES (2016)

Bottom Line

Is the reduction of the SALT deduction just a rich person problem? Yes and no. It’s probably more accurate to say it’s a rich-person-in-a-blue-state problem. Residents of high-tax California, D.C., Massachusetts, Illinois, Maryland, Connecticut, New York and New Jersey would be the filers most impacted. Further, you don’t have to be truly wealthy to be impacted by the SALT deduction cap. Middle class Americans who currently itemize, especially those who are homeowners paying substantial property taxes, may also face higher taxes.

Tips for Tax Season

• A financial advisor can help optimize your financial plan to lower your tax liability. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you don’t know whether you’re better off with the standard deduction versus itemized, you might want to read up on it and do some math. You could save a significant amount of money by educating yourself before the tax return deadline.
• If you’re having trouble figuring out what kind of taxes you’ll be paying, try using SmartAsset’s free income tax calculator. Just plug in where you live, your household income and your filing status and the calculator can help you figure out what you’re likely to owe.

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