The SALT (State and Local Tax) deduction allows taxpayers to deduct their payments for state and local taxes, such as income, property, and sales taxes when filing their federal taxes. This benefit is especially valuable for residents of high tax states like California, as it can significantly reduce their overall federal tax liability. However, since the 2017 Tax Cuts and Jobs Act, the SALT deduction has been capped at $10,000 annually. This means that even if someone pays more than that in state and local taxes, they can only deduct up to $10,000, which many high income earners found limiting.
A Proposal to Raise the Cap
Recently, there has been a proposal in the new U.S. budget to raise this cap to $40,000. If enacted, this change would allow high earners to deduct much more of their state and local taxes, reducing their federal taxable income and, consequently, their federal tax bills. For high income Californians who pay significant state income or property taxes, this could mean substantial savings.
Tax Deductions
For example, if a high income California resident pays $50,000 in SALT taxes annually, moving from a $10,000 cap to a $40,000 cap would increase their deductible amount by $30,000. Assuming they are in a top federal tax bracket of around 39.6%, this could translate into a potential federal tax savings of approximately $11,880 each year. This change would provide much needed relief for residents of high-tax states and help offset some of the previously limited benefits of SALT deductions.
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