State and Local Tax (SALT) Deduction: How It Impacts U.S. Taxpayers

Taxes and tax breaks are a major point of contention among U.S. leaders. The SALT (State and Local Tax) deduction is the most pertinent of them all. No, the SALT deduction isn't actually about salt, but it does affect many taxpayers in the U.S.

The renewed discussion on the SALT deduction has left Democrats and Republicans alike at odds. With the SALT tax ceiling set to expire in 2025, politicians are debating what to do next. What is the SALT deduction and how does it work?

SALT stands for the “state and local tax” deduction that taxpayers can claim when they don’t take a standard deduction and choose to itemize instead. For anyone that itemizes their personal deductions, they can deduct $10,000 with the SALT deduction or $5,000 for married people filing separately.

Deductible taxes include state and local real estate and personal property taxes. This also includes income taxes or general sales taxes. Anyone who chooses to itemize can deduct property taxes but they have to choose between income or sales tax. Most people choose income taxes for a higher payment.

Since the value of the deduction increases with income, high-income taxpayers are more likely to take the deduction. Lower-income filers aren't left out, but it's disproportionate. According to the Tax Policy Center, statistically, 16 percent of filers who claimed the deduction in 2017 had an income between $20,000 and $50,000. Meanwhile, 76 percent of filers who claimed the deduction had income between $100,000 and $200,000, while 90 percent who claimed the deduction had income over $200,000.

The deduction is disproportionately more beneficial for the wealthier and those in states with high-income taxpayers. People in states like California or New York usually deduct their state and local income tax if they itemize. Residents in states like Louisiana and Texas opt to deduct their sales tax if they itemize because the sales tax is generally higher in those areas. It's important to remember that property and income tax are the main drivers of SALT deduction and not sales tax.

In 2018, Trump placed a cap on the SALT deduction in order to recover revenue lost from various tax cuts. Now, the SALT tax cap is set to expire in 2025. Leaders are trying to decide whether to lift the ceiling on the cap or reinstate the same limit. While it’s possible to assume that this is a Republican issue, many Democrats from high tax-paying states are in favor of either getting rid of the cap or increasing it from $10,000 to $80,000.

While House Democrats are in favor of the $80,000 push, Senate Democrats prefer a “less generous option” that would slowly phase out the deduction for anyone filing that has $400,000 or more in income. The argument is that many Democrats think an $80,000 cap will put more money back into the hands of middle-class families and ensure investment in local communities. Statistically, 54 percent of the savings from SALT goes to the top 1 percent of earners and less than 1 percent goes to the bottom 60 percent of earners.