By Ashlea Ebeling | Wall Street Journal
Business owners continue to get the biggest tax benefit
The fight over deductions for state and local taxes almost sunk President Trump’s megabill, which is headed to his desk with a new $40,000 cap on the deductions, up from $10,000.
The megabill also lets some business owners continue to dodge the cap on deductions for state and local taxes, or SALT.
The cap became a point of contention among Republicans, with House representatives from high-tax states such as New York and California arguing for a higher cap. GOP senators, who don’t represent the highest-tax states, had pushed for a lower limit.
The Senate set the $40,000 cap to expire after 2029 while the House would have made it permanent.
What’s changing
The megabill boosts the maximum SALT deduction for single filers and married couples to $40,000 through 2029, before going back to $10,000 in 2030. The higher cap would start phasing out as income exceeds $500,000. The cap and income thresholds would increase slightly each year.
The phaseout range ends at $600,000, when taxpayers would again face the $10,000 cap. That means a married couple with a combined $600,000 in wage earnings could lose out on $30,000 in extra SALT deductions. By comparison, a couple with $500,000 in earnings could deduct $40,000, said Grant Keebler, a tax lawyer in Green Bay, Wis.
Owners of pass-through businesses like S corporations and partnerships, whose business income passes through to their individual returns, will still be able to use workarounds available in most states to effectively get unlimited SALT deductions.
A business owner who has $1 million in business income and pays $60,000 in state income taxes could deduct that full amount, for a tax savings of about $22,000, Keebler said. A business owner who has $30 million in business income and pays $2 million in state taxes could save as much as $740,000.
The $10,000 cap on SALT deductions was put into place with the 2017 tax law. There was no cap before that, although the alternative minimum tax sometimes limited SALT deductions for some top earners. The cap hurt millions of mostly high-income taxpayers in high-tax states. Most taxpayers in those states still received net tax cuts from the 2017 law.
Whether taxpayers benefit from the new $40,000 cap depends on whether they take the standard deduction or itemize deductions. Taxpayers typically choose whichever is higher, and the higher SALT cap will change the equation for many people. Itemized deductions can include those for state and local taxes, mortgage interest, charitable contributions and medical expenses.