Big Tax Breaks Still Possible as Democrats Debate Spending Plan
Democrats in both the House and the Senate are still fighting to change the $10,000 cap on the federal deductions limit for state and local taxes.
See: Child Tax Credit in Danger? Planned Payments Could Be Reduced by 4 Years If Budget Battle Divides Democrats
Find: Stimulus Errors: Was Your Child Tax Credit Check Smaller Than Usual? Here’s What’s Going On
The SALT measure, as it’s called, is mainly being pushed by legislators in high-tax states like New York, New Jersey and California, and permits taxpayers to itemize when filing federal taxes.
When filing taxes, there is a choice to either itemize deductions or pay a flat fee. Business owners typically itemize to maximize the deductions allowable by law. Prior to changes made in 2018, certain taxes were allowed to be deducted on itemized deductions. For example, let’s say you pay $6,000 in school taxes and $10,000 in property taxes, those taxes were allowed to be deducted from your gross income, effectively lowering your taxable amount. The deduction was put in place to provide those who were already paying higher taxes than the rest of the country relief when it came to taxes in other areas.
The Trump administration repealed this and instated a cap of $10,000 for all deductions. This largely affected residents of New York and California, effectively raising residents’ taxes. New York and California have some of the highest state and local tax rates in the country — meaning they are two of the largest contributors to tax revenue.
Democrats are now fighting to reinstate higher SALT deduction limits, which may come at a cost. The SALT limit deduction brought in $77.4 billion in tax revenue during its first year, according to the Joint Committee on Taxation. A full repeal for 2021 may cost up to $88.7 billion and more going forward, reports CNBC.
But what could it mean for you if it gets passed?
In short, a big tax break, especially if you’re a resident of a high-tax state. SALT deductions will allow you and your family to deduct taxes you are paying in other areas from overall income tax.
The scope of the benefit is conflicted though, as the top 20% of Americans may receive more than 96% of the benefit of a SALT cap repeal according to a Tax Policy Center report, affecting only 9% of households overall.
More From GOBankingRates