Who will — and won’t — benefit from the bigger SALT deduction

By Jeanne Sahadi CNN For the next five years there will be a much more generous state and local tax deduction available to federal income tax filers thanks to the in the last few days enacted mega tax-and-spending-cuts law The new law lifts what had been a cap to for tax year and then adjusts it upward by a year for and RELATED Are we pouring SALT on housing s affordability wounds Related Articles Are we pouring SALT on housing s affordability wounds What to know and what isn t known yet about US tax deductions for tips and overtime pay Albany leaders consider budget stabilizing measures as revenue falls short Want to buy an EV or get rooftop solar What Trump s megabill means for you What Trump s big tax law could mean for the youngest Americans The SALT deduction as it is known enables federal income tax filers to deduct either their state and local income taxes or their state and local general sales taxes On top of that they are also allowed to deduct their property taxes assuming their income or sales taxes don t put them over the cap But the increased cap may only help a minority of federal income filers Here s a breakdown of who will benefit who will not as well as those who won t benefit from the change but are still better off Who will benefit Itemizers The SALT break may only be taken by those who itemize deductions on their federal returns Prior to there was no cap on the SALT deduction but the Tax Cuts and Jobs Act capped it at for everyone while at the same time greatly expanding the standard deduction Typically the only reason to itemize your deductions is if combined they exceed your standard deduction The net effect of those two changes together is that far fewer filers chose to itemize in favor of taking the standard deduction Before of my clients would itemize Now take the standard deduction noted Tom O Saben director of tax content and establishment relations at the National Association of Tax Professionals As a consequence of the latest change O Saben expects a few of his clients to resume itemizing but not nearly as a large number of as did before That s because the new law further expands the standard deduction for to for single filers up from the previously scheduled for this year up from for heads of household and for married couples filing jointly up from And those amounts will be adjusted for inflation in subsequent years Filers living in high-tax areas Filers from high-tax states such as California New York and Illinois or high-tax cities are likely to benefit most of from the SALT cap increase assuming their income makes them eligible to claim as much as see next item That s especially the occurrence for homeowners in these areas because they are more likely to itemize thanks to the combination of their state and local tax deduction plus their mortgage interest deduction But even chosen filers in states that don t impose an income tax but do levy high sales or property taxes could benefit as well O Saben noted Filers making less than The new SALT provision limits who may deduct the full to tax filers with modified adjusted gross incomes of or less MAGI in this instance is defined as your US-based income plus any earned income you made in Puerto Rico Guam the Northern Mariana Islands and foreign countries for which you d ordinarily get a tax credit or exemption Filers with MAGIs over but less than This group will be allowed to take more than a deduction but less than the cap Their deduction will be reduced by of the amount their income exceeds So for example if your MAGI is you will be allowed to deduct - of Who won t benefit from the higher SALT cap Those with MAGIs of at least The SALT deduction will be limited to for anyone whose MAGI is or more Filers who don t itemize Anyone whose itemized deductions including the state and local taxes they pay do not exceed the standard deduction won t benefit from the higher SALT cap but they will still benefit from the higher standard deduction and the fact that taking it will reduce their tax bill more than if they itemized Partners and shareholders in pass-through entities Partners and shareholders in businesses that are structured as pass-through entities e g LLCs or S-Corps typically pay the businesses taxes on their individual returns If they do the rules that dictate who may deduct up to in state and local taxes would apply to them But plenty of don t have to worry about the SALT cap at all That s because in the wake of the tax law which imposed the cap multiple states developed a workaround for pass-through entities that allowed or in specific cases mandated the entities to pay the state taxes and get an unlimited deduction for them at the entity level That then lowers the federal taxable income for the partners and shareholders Those workarounds had the effect of letting the partners or shareholders avoid the SALT cap altogether Typically the pass-through entity doesn t pay taxes at all But in chosen states passthroughs can elect to be taxed instead noted Brian Newman the federal tax services practice leader at CohnReznick Advisory LLC While this has complicated pass-through entity taxation Newman noted it s been a huge benefit for partners and shareholders Earlier versions of the tax-and-spending-cuts package would have curtailed the benefits of the state workarounds for specified trades and businesses But the final Senate version which is what ultimately became law did not Newman commented The-CNN-Wire Cable News Structure Inc a Warner Bros Discovery Company All rights reserved