Fact Checked

States sue U.S. government over tax reform’s new SALT cap: What this could mean for you

Elegant brownstones and townhouses in the Fort Greene area of Brooklyn, New York CityImage: Elegant brownstones and townhouses in the Fort Greene area of Brooklyn, New York City

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This article was fact-checked by our editors and reviewed by Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®.

Last week, New York, Connecticut, Maryland and New Jersey sued the federal government in U.S. District Court.

Why? To challenge the cap that the federal government placed on the amount of state and local taxes you can deduct from your federal income taxes.

The Tax Cuts and Jobs Act, passed last December, placed a $10,000 limit for individuals and married people filing jointly — $5,000 for married people filing separate tax returns — on the amount you can deduct for state and local property taxes (including real estate) and income taxes (or sales taxes) combined.

Previously, the amount you could deduct for these state and local taxes — known as the SALT deduction — was unlimited, with certain exceptions.

What the states’ suit claims

In their complaint, the four states ask the court to invalidate the cap, charging that the SALT deduction cap …

  • Is unconstitutional and without precedent
  • Will cause millions of taxpayers in plaintiff states to pay more in federal taxes — the cap will cause New York taxpayers to pay an additional $14.3 billion in federal taxes in 2018 alone
  • Will likely decrease home values in the plaintiff states
  • The decrease in home prices will decrease homeowners’ equity in their homes and jeopardize the retirement, college educations and investments of taxpayers in the plaintiff states
  • Intentionally targets the plaintiff states to force them to change their fiscal policies

What does this mean for you?

If you live in a state with high real estate taxes and/or income taxes — such as New York, Connecticut or New Jersey — the cap on the SALT deduction could mean you’ll pay more for tax years between Jan. 1, 2018, and Dec. 31, 2025 (when the limit is set to expire).

For example, if in 2017 you paid state income tax of $5,000 and state real estate tax of $10,000, you could have deducted that $15,000 on your federal tax return, provided you itemized your deductions. That deduction would have lowered your taxable income and, by correlation, lowered the amount of federal taxes you owed.

2017 tax year

State income tax State real estate tax Federal deduction
$5,000 $10,000 $15,000

 

For 2018, that deduction will be capped at $10,000.

2018 tax year

State income tax State real estate tax Federal deduction (capped)
$5,000 $10,000 $10,000

 

If the states are successful in challenging the SALT deduction cap, the courts could order the federal government not to enforce the provision. That would mean that taxpayers paying high income and property taxes could continue deducting the full amount from their federal income taxes.

What can you do?

It’s anyone’s guess whether the states’ lawsuit will succeed. If you’re concerned about the SALT deduction limit, here are some ways you can take action.

First, familiarize yourself with the particulars of tax reform and how it might affect you, especially your paycheck and as a homeowner. Stay on top of the news covering the states’ lawsuit, as other states may join in.

Meanwhile, you can also take steps to minimize your federal income tax liability.

  • Make sure you have the right amount of federal income taxes deducted from your wages. You can use the IRS Withholding Calculator to do this. The amount you have withheld throughout the year will affect how much federal income tax you owe — or gets refunded to you — when you file your 2018 taxes in 2019.
  • Consider maxing out your HSA contributions, if applicable. If you’re eligible to participate in a health savings account, consider contributing the maximum allowable amount — $3,450 for self-only plans and $6,900 for family plans in 2018. Those contributions are tax deductible, and you can use the money in your HSA to pay for qualified medical and health expenses.
  • Consider maxing out your 401(k) contributions. For 2018, you can defer up to $18,500 of your wages into your employer-sponsored 401(k), which can reduce your federal tax liability. If you’re 50 or older, you may be eligible to put an additional $6,000 into your traditional and safe harbor 401(k) plans. Keep in mind there’s an overall limit of 100% of your compensation or $55,000 (whichever is less) — up to $61,000, including catch-up contributions, if you’re 50 or older — for the total 2018 annual contributions into all your retirement accounts maintained by one employer and any related employer.
  • Consider challenging your property tax assessment. This might lead to lower real estate taxes.
  • Evaluate whether itemizing your deductions or taking the standard deduction might give you a bigger tax benefit for 2018. Tax reform temporarily increased the standard deduction to $24,000 for married couples filing a joint return, $18,000 for people filing as head of household, and $12,000 for single filers and married couples filing separate returns. If your itemized-deduction total is less than your standard deduction, you may decide itemizing isn’t worth the effort. But if you think itemizing will give you the bigger tax advantage, take steps to document throughout the year every deduction you plan to take, like a deduction for charitable contributions.

Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.


About the author: Evelyn Pimplaskar is an assigning editor with Credit Karma, covering checking, savings, personal finance and taxes. With nearly 30 years of experience in media, marketing, public relations and journalism, Evelyn’s wri… Read more.