You may have heard the term "SALT" cap, but what is it and how does it affect you?
The Tax Cuts and Jobs Act of 2017 included a limit on the deductibility of state and local taxes, abbreviated as the SALT cap. When an individual taxpayer files their taxes they are allowed to either use the standard deduction set by the internal revenue code or they may use itemized deductions. Generally, the taxpayer will select the route that allows them to deduct the highest amount.
Itemized deductions are taken on Schedule A of Form 1040. There are multiple deductions permitted to be taken here. From taxes paid, home mortgage interest, to certain medical expenses and charitable contributions.
Prior to the Tax Cuts and Jobs Act of 2017 there was not a cap on the amount of state and local taxes a taxpayer could itemize. This allowed taxpayers who paid high amounts of state and local taxes to reduce their federal tax liability significantly. The act placed a limit of $10,000 for state and local income taxes on individual itemized deductions.
The SALT cap however does not apply to businesses. This means that small business owners whose businesses are paying taxes are not having to take a hit deducting taxes for their business.
The SALT cap has been controversial since it's passing. While it is set to sunset, or expire, after 2025 there has been litigation by multiple states to declare the cap unconstitutional. Recently a ruling that upheld the SALT cap was appealed to Supreme Court. On Monday April 18th, 2022 the Supreme Court declined the request to review the court case that upheld the SALT cap.