The TCJA Cuts Taxes Across Every Income Level and Congressional District

October 30, 2018

The Tax Cuts and Jobs Act (TCJA) placed a $10,000 cap on state and local tax (SALT) deductions, generating anxiety among taxpayers 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) exemption and phaseout. And more broadly, the TCJA provides tax cuts to average taxpayers across all income groups, even in high-tax states.

 

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 deductions, 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 deduction for individual income tax 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 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.

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