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Efforts Underway to Roll Back Deduction Cap for State and Local Taxes


Lawmakers from high-tax states on both sides of the aisle are coming together to propose legislation that would reverse the provision capping the deduction for state and local taxes at $10,000. This move is gaining momentum, with the House scheduling a procedural vote to pave the way for further debate on the matter. If approved, the bill would double the SALT deduction cap for married couples filing jointly for the 2023 tax year, as long as their adjusted gross income is below $500,000.

Support Grows with a New Addition

This effort is expected to gain additional support later this month, as Democrat Tom Suozzi assumes the House seat previously held by George Santos. Suozzi has been a vocal critic of the provision that capped the deductibility of SALT levies during his previous tenure in Congress. His campaign also focused on this issue as he fought to regain his seat.

An Uphill Battle

Despite the growing support, experts believe that passing this legislation will be an uphill battle. The Trump tax overhaul of 2017 introduced the $10,000 cap on deducting state and local income taxes, aiming to balance the reduced tax rates offered by the package. Prior to this change, taxpayers enjoyed unlimited deductions. Proponents of raising or eliminating the cap argue that it results in double taxation, and it has become a pressing political matter, particularly for representatives from wealthier, high-tax states such as New York, New Jersey, and California.

However, outside of these regions, interest in the issue diminishes significantly, making it challenging to create a broad coalition in support of policy change. John Buhl, senior communications manager at the Urban Institute, explains that despite being a bipartisan concern, the true political constituency is limited to specific high-tax states and cities.

In conclusion, lawmakers are making strides towards overturning the cap on deductions for state and local taxes. While the road ahead may be arduous, the growing support and efforts by influential individuals such as Tom Suozzi are inspiring hope for a change in policy.

Tax Advisors Find Ways to Work Around SALT Deduction Limits

In an effort to help their clients navigate the limitations on state and local tax (SALT) deductions, some advisors are exploring alternative strategies. One approach involves setting up pass-through entities like partnerships or S corporations, allowing clients to pay taxes through these entities, which are not subject to the SALT deduction cap.

A bill currently under consideration in the House of Representatives, sponsored by Rep. Michael Lawler (R., N.Y.), proposes a temporary solution for the 2023 tax year. If passed, the cap would revert back to the $10,000 level established by the 2017 bill. However, if Congress takes no action, the deduction cap, along with other provisions set to expire after 2025, will be eliminated altogether.

Robert Pearl, a wealth advisor and co-founder of G&P Financial, notes that these types of bills are typically introduced during election years. They tend to appeal to members of Congress from high-income states who are seeking re-election. However, he believes there is only a “slim chance” that the bill will gain enough support to pass in the House. Even if it does, he predicts that it will face significant opposition in the Senate.

Duane Thompson, president of consulting group Potomac Strategies, acknowledges the challenging political landscape surrounding this issue. He predicts that the effort to temporarily increase the SALT deduction will likely fail due to divisions among GOP House Republicans. While lawmakers from swing districts in New York may be inclined to support the bill for their constituents’ benefit, a majority of Republicans are opposed.

Despite the uncertainty surrounding its success, Thompson believes that bringing the measure to the floor serves as a way for House Republicans in swing districts to demonstrate their support for their constituents. By voting in favor of the bill, even if it ultimately fails, these lawmakers can claim that they stood up for their constituents’ interests.

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