In a recent development in the United States, homeowners facing high property taxes or high housing prices may have a chance to enjoy tax deductions! For American citizens looking to purchase property in regions with high property tax rates and tax burdens, there may be some relief on the horizon. President Trump’s new tax reform bill, known as the “Big Beautiful Bill Act,” was just passed by the House of Representatives on May 22nd. One of the key changes included in the bill is an increase in the limit for deducting “State and Local Taxes (SALT).” To find out if this tax law can benefit you, let’s dive into the analysis.
The content of the bill, referred to by President Trump as the “Big Beautiful Bill Act,” encompasses a variety of tax and expenditure plans. In a narrow vote with 215 in favor and 214 against, the House of Representatives passed the bill on the morning of May 22nd. One of the changes involves raising the limit on deducting “State and Local Taxes (SALT)” from the current $10,000 to $40,000 when filing federal income taxes.
Firstly, let’s understand what the deduction for State and Local Taxes (SALT) entails. It includes property taxes, state income taxes, and sales taxes. However, only one of either state income tax or sales tax can be deducted. Additionally, some cities have local taxes that can also be deducted, along with the deduction for property taxes. These deductible items are added up, subtracted from annual income to derive the final taxable income for federal taxes. This is then multiplied by the tax rates of different brackets to determine how much federal tax is owed.
Originally, there was no limit on the SALT deduction. However, in 2017, during Trump’s first term, the “Tax Cuts and Jobs Act (TCJA)” was passed, limiting the SALT deduction to $10,000. This means that taxpayers with SALT amounts exceeding $10,000 could only deduct up to $10,000 when filing federal income taxes, and any excess amount could not be deducted. This rule applied to both individual and joint tax filers.
This restriction particularly disadvantaged states with high tax burdens like California, New Jersey, and New York, where residents face not only high income taxes but also high property prices and property taxes. Even middle-class families in these states easily exceed $10,000 in state and local taxes, limiting their deductions and causing them to bear heavier federal taxes.
If the tax reform passes, raising the SALT deduction limit to $40,000 could be a major boon for residents in high-tax regions. However, it is essential to note that tax deductions can be divided into standard deductions and itemized deductions. For most taxpayers, standard deductions may be sufficient as they involve simpler expenses. It is possible that without significant additional investments, donations, significant medical expenses, property taxes, mortgage interest, etc., standard deductions may lead to more tax savings, as the tax system automatically selects the most advantageous option for taxpayers.
For high-net-worth individuals or residents in high-tax regions, the increased SALT deduction limit would be highly beneficial. States with income tax rates exceeding 10%, high property tax rates, or high property prices, coupled with generally affluent residents, would be among the beneficiaries of the raised limit. The states benefiting the most are:
1. New York State, with high state income tax rates exceeding 10% and significantly high property prices, especially in areas like New York City, Long Island, and Westchester, where typical middle-class households may easily face SALT taxes up to $25,000.
2. California, with the highest state income tax rates in the U.S., reaching 13.3%, and cities with extraordinarily high housing prices, particularly in the Los Angeles and San Francisco Bay Areas. Although property taxes may be relatively low due to Proposition 13 protection, high housing prices lead to significant actual payments. Additionally, the presence of high-earning technology professionals and dual-income families in California benefits from the increased limit.
3. New Jersey, with relatively moderate state income taxes but the highest property taxes in the country. Many residents commute across state lines to work in New York, leading to high incomes and making them among the beneficiaries.
4. Connecticut, situated near New York City, attracts wealthy families due to high state taxes and property prices.
5. Illinois, with high property taxes and not low state income taxes, also offers substantial deduction opportunities.
Other possibly benefiting areas include the Boston area in Massachusetts, Bellevue in Washington, affluent suburbs near Washington D.C. in Maryland, and Hawaii. These regions usually feature high property prices or high property tax rates, resulting in significant SALT taxes.
Conversely, residents in some regions may not benefit from the increased deduction limit. States such as Florida, Texas, and Nevada, which do not have state income taxes, although property taxes may be high, have lower overall state and local taxes. Additionally, some Midwestern and Southern states with lower property prices and tax rates combined may find it challenging to exceed $10,000. Furthermore, individuals opting for standard deductions over itemized deductions would not benefit from the raised deduction limit.
Suppose we consider an example calculation for a married couple in New York City to illustrate the tax-saving effects of increasing the SALT deduction limit from $10,000 to $40,000. Assuming a combined annual income of $250,000, state tax of $18,000, city tax of $9,000, property tax of $12,000, mortgage interest of $10,000, and charitable donations of $2,000.
Under the current system, the SALT taxes amount to $39,000, comprising state tax, property tax, and local taxes, which can only be deducted up to $10,000. Adding the mortgage interest and donations, the total deduction amounts to $12,000. Therefore, the total deductible portion is $22,000 ($10,000 + $12,000) under the itemized deduction approach.
Under the new calculation method with the deduction limit at $40,000, the $39,000 in SALT taxes can be fully deducted, plus the $12,000, resulting in a total deductible amount of $51,000. Subtracting this from $250,000 yields $199,000, which, when subjected to the federal progressive tax rates, results in a tax liability of $33,886, a $4,999 difference from the previous $38,885.
For regions like New York City with high state and city taxes along with property taxes, this tax modification indeed leads to a significant reduction in actual taxes owed. Additionally, having mortgage interest and charitable donations can further benefit from itemized deductions instead of standard deductions.
However, although the increased SALT deduction limit appears to be a widespread tax reduction measure, it may not necessarily be advantageous for certain groups and could even have negative effects.
Firstly, for low to middle-income groups whose total state and local taxes fall below $10,000, most of these individuals can benefit from the standard deduction without opting for itemized deductions. Therefore, even with the raised SALT deduction limit, choosing itemized deductions may provide little to no actual benefit. While there may be no direct harm, this could lead to a further narrowing of the “tax burden gap” between lower and higher-income earners. It is worth noting that with the successful passage of Trump’s “Big Beautiful Bill Act,” there may be an opportunity for an increase in the standard deduction, potentially raising it to $16,000 for individuals and $32,000 for joint filers.
Secondly, residents in states without state income taxes, such as Florida, Texas, Nevada, and Washington, although having high housing prices, may find it challenging to exceed $10,000 in total SALT taxes due to the absence of state tax burden. On the other hand, residents in high-tax states would greatly benefit, creating a sense of regional tax inequity. However, as a counterpoint, the previous limit of $10,000 placed these high-tax states in a disadvantageous position.
Thirdly, there is a risk of reduced welfare spending. It is estimated that by raising the SALT deduction limit, federal tax revenues could decrease by approximately $624.5 billion over ten years. Such fiscal deficits would necessitate cutbacks in welfare expenditures, which might require increases in other taxes. This could potentially lead to reductions in education, healthcare, and tax refunds for the general public.
Fourthly, individuals with annual incomes exceeding $500,000 would see reduced deductions. While the SALT deduction increases, there are restrictions for eligible individuals, applicable only to households with annual incomes not exceeding $500,000. Beyond this threshold, the deductible amount would progressively decrease. Consequently, high-income households might not fully benefit and may even face secondary limitations.
Furthermore, individuals aged 65 and above can also benefit from additional deductions in the new tax law. Currently, the extra deduction for individuals aged 65 and above is $2,000 for single filers and $3,200 for married filers. This additional deduction would increase under the new law to $4,000 for singles and $8,000 for married couples. However, this enhanced deduction only applies from 2025 to 2028 and comes with income restrictions: adjusted gross income (AGI) not exceeding $75,000 for single filers and $150,000 for married filers.
The “Big Beautiful Bill Act” encompasses several tax laws and expenditures, with the focus of this analysis being on the SALT deduction limit. This aspect is most relevant to the real estate sector and will have a notable impact on the housing market once the bill passes. The enhanced deduction limit might increase the attractiveness of home purchases in high-tax states, consequently supporting housing prices. However, this change may not hold much significance for renters.
While the new tax laws have already been approved by the House of Representatives, Trump is urging the Senate to expedite the review and approval process. The Senate may also make amendments to the bill, awaiting the approval of a unified version by both chambers before being presented to Trump for signing into law. House Speaker Mike Johnson aims to submit the bill to the President’s desk by July 4th.
This comprehensive analysis sheds light on the potential implications of the tax reform bill, particularly regarding the significance of raising the SALT deduction limit and its impact on various segments of the population. It highlights both the benefits and drawbacks of the proposed changes, emphasizing the complexity and far-reaching consequences of tax reform on individuals and communities. The evolving tax landscape underscores the importance of considering the diverse needs and circumstances of taxpayers in crafting equitable and effective tax policies.
In conclusion, while the proposed tax reforms hold promise for certain groups, they also pose challenges and concerns that warrant thoughtful consideration and further deliberation in the legislative process. As the bill progresses through the Senate and potentially becomes law, it will be essential for policymakers to address the nuances and implications of the new tax provisions to ensure a fair and balanced approach to tax policy that serves the interests of all Americans.