The Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth. placed a $10,000 cap on state and local tax (SALT) deductionThe state and local tax (SALT) deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. The Tax Cuts and Jobs Act (TCJA) capped it at ,000 per year, consisting of property taxes plus state income or sales taxes, but not both. s, generating anxiety among taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers in high-tax states who fear the deduction cap will increase their federal income tax liability.
In reality, TCJA reforms might increase the number of taxpayers who will benefit from SALT by increasing the Alternative Minimum Tax (AMT)The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system. exemption and phaseout. And more broadly, the TCJA provides tax cuts to average taxpayers across all income groups, even in high-tax states.
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The AMT requires mostly upper-income taxpayers to calculate their taxes twice, under two sets of rules, and pay whichever is highest. The AMT is meant to prevent taxpayers from receiving excessive benefits from tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. s, including SALT. Nearly 60 percent of filers with incomes between $200,000 and $500,000 in 2015 were hit by the AMT, meaning they received no SALT deduction at all.
But the TCJA significantly increased the AMT exemption and exemption phaseout, meaning fewer taxpayers will file under the AMT, and more taxpayers will be able to itemize. The IRS estimates AMT filings will drop from 10 million to 1 million or fewer as a result of the TCJA. Rather ironically, this means more taxpayers will claim a limited SALT deduction under the TCJA than they did in 2017.
In addition to reforming the AMT, the TCJA made other significant tax reforms, such as broad rate cuts and a doubling of the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. filers. We estimate TCJA reforms cut taxes for average taxpayers across every income level and congressional district.
This is true for every state, even in high-tax states where the SALT deduction is most valuable.
For instance, take the average taxpayer in the $200,000 income bracket in New York’s Congressional District 10. This congressional district includes a portion of New York County—the county with the highest SALT deductions in the United States in 2016. Taxpayers in this district will see an average tax cut of 2.4 percent as a percentage of their after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income. from the TCJA.
The $10,000 SALT cap provides one way to financially offset the cost of the TCJA. This provision, along with the TCJA’s reforms to the AMT and other individual provisions, will expire as scheduled after 2025 if Congress does not make the individual provisions of the TCJA permanent.Share