In 2018, Democratic presidential nominee Joe Biden and his wife took a $10,000 deduction for state and local taxes on their federal tax return (the most recent tax return available for review). While this deduction provided the Bidens with some tax savings, it was a fraction of the substantial savings they could have realized if not for the Tax Cuts and Jobs Act which was signed into law at the end of 2017.
The Tax Cuts and Jobs Act imposed a $10,000 cap on the "SALT deduction," which is the federal deduction you can claim for state and local taxes (SALT) if you itemize. There had been no cap prior to 2017. If the law hadn't changed and no $10,000 limit had been imposed, the Bidens would have been able to deduct the entire $361,966 they paid in state and local taxes in 2018. Effectively, the SALT cap reduced the Biden's tax deductions by nearly $352,000.
If Biden wins the presidency and the Democrats take control of the Senate after the November election, however, there's some chance that this deduction cap could disappear and the Bidens would potentially get their full deduction back again.
Will the SALT deduction cap survive a Biden presidency?
Since the Tax Cuts and Jobs Act was passed, Democrats have been working to repeal the SALT deduction cap. Biden has expressed support for repeal and other leading Democrats (including Senate Minority Leader Chuck Schumer and Speaker of the House Nancy Pelosi) have targeted the cap.
In fact, the Democrat-controlled House of Representatives recently included a provision in the coronavirus relief bill, the HEROES Act, that would have removed the cap for 2020 and 2021 (if the law passed, which it likely won't). This latest effort followed a bill the House passed in 2019 -- with some Republican support -- that would have eliminated the cap for most Americans, but which was dead-on-arrival in the Republican-controlled Senate. For his part, Schumer has also promised repeal, saying in July that one of his first priorities if he became Senate Majority Leader would be to eliminate the SALT cap, which would be "dead, gone and buried."
Democrats, including Biden, are eager for a repeal of the SALT cap because they say it generally hits residents in "blue states" harder. States with Democrat-controlled legislatures and/or that reliably vote Democrat in presidential elections (often referred to as blue states) are more likely to fund various government services within the state through income and property taxes rather than through other means (although residents in some red states also fund their governments this way). The larger the state and local tax burden, the more valuable the SALT deduction used to be for those filing federal returns.
Republicans added the SALT cap to help address some of the tax revenue loss created by other changes the 2017 law enacted. For some, the SALT deduction cap was considered a targeted tax by Republicans on blue states. It's inclusion in the tax reform bill prompted Democratic government leaders in several of these blue states to sue the federal government, alleging the SALT cap was an unconstitutional assault on their sovereign choices.
While blue state residents were disproportionately affected by the SALT cap, the added tax burden imposed by the cap affected some residents in all states. However, it was not distributed evenly in a different way. As Biden's tax returns and the value of his lost deductions show, the wealthy tend to disproportionately benefit from an uncapped SALT deduction. Most people do not pay anywhere near the $361,996 the Bidens paid to their state and local governments. In fact, most people don't even itemize on their taxes at all and the majority of Americans don't claim any deduction for state and local taxes paid.
A Brookings Institute analysis of tax filing data suggests that 96% of the benefits of repealing the SALT cap would go to the top quintile of taxpayers. The report said the top 1% (by income) of filers would receive an increase in their average tax deduction of $33,100 compared with the middle 60%, who would increase their annual tax deduction an average of less than $27. With Biden's other tax plans largely aimed at increasing taxes on the wealthy rather than reducing them, his support of repealing the SALT Cap is somewhat at odds with his other proposals, although it is also in line with the majority position within the Democratic party leadership.
If you paid over $10,000 in state and local taxes and you itemize, a repeal could save you some money on your IRS bill if Biden is elected and the Democrats pushing for this legislative change are successful in their repeal efforts. Otherwise, you'll be grouped among the majority of Americans not really affected by this proposed repeal at all.
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