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Changes come with every new administration. While the focus is primarily on restoring the economy due to the pandemic, taxes are definitely one of the top areas of President Biden's agenda later in his presidency. In the meantime, the Internal Revenue Service (IRS) released one of the most anticipated datasets; the returns by state and county for the 2018 tax year. This new dataset includes all the changes that were made on the amounts that taxpayers are allowed to deduct on state and local taxes due to the Tax Cuts Jobs Act (TCJA). In the last three years, we were trying to estimate what the TCJA could mean for every taxpayer. However, there weren't any actual data to show the real impact of the new tax provisions on taxpayers since these provisions went into effect in the 2018 tax year.
Background
Starting from the 2018 tax year, taxpayers have been able to claim up to $10,000 for SALT (state and local tax) deduction. In contrast, before the TCJA, there was no limit. The SALT deduction includes property, income and sales taxes. To be more specific, a taxpayer who itemizes can deduct property taxes but the taxpayer needs to choose between deducting income and sales taxes. Taxpayers of states with high income taxes typically opt to deduct their state and local income taxes while taxpayers of states with high sales taxes typically deduct their sales taxes. Generally, taxpayers deduct property and income taxes using the SALT deduction.
Findings
To better understand the impact of this provision on taxpayers, NAR compared how many taxpayers benefited from the SALT deduction before and after the TCJA. To do so, we calculated the percentage of taxpayers that used the SALT deduction and the average deduction for every state and county in the 2017 and 2018 tax years, respectively.
As expected, fewer taxpayers deducted their state and local taxes in the 2018 tax year due to the new cap. Nationwide, 11% of taxpayers used the SALT deduction in 2018 compared to 31% in 2017. This is a decrease of nearly 30 million taxpayers who didn't deduct their state and local taxes in 2018 from a year earlier. While SALT deductions are limited to $10,000, the average amount of deduction decreased to $8,430 in 2018 from $13,400 in 2017.
Connecticut, Minnesota and New Jersey lost most of the taxpayers that used to claim the SALT deduction
At the state level, Maryland (24%) had the highest share of taxpayers who claimed the deduction in the 2018 tax year followed by the District of Columbia (22%), Virginia (18%) and California (18%). The percentage claiming the deduction ranged from 4% in West Virginia to 24% in Maryland.
However, when we compare the number of taxpayers claiming the SALT deduction in 2018 with that of 2017, we see that far fewer taxpayers deducted their state and local taxes in Connecticut in 2018 from a year earlier. In fact, the share of taxpayers claiming the deduction dropped by 27% to 15% in 2018 from 42% in 2017. This translates to nearly 470,000 taxpayers who didn't deduct their state and local taxes in Connecticut in 2018. New Jersey (-25%) and Minnesota (-24%) also had some of the largest declines of the share of taxpayers claiming the SALT deduction in 2018. Keep in mind that these are states with high state and local taxes. For instance, in Connecticut, the average amount of the SALT deduction in 2017 was nearly $20,900. However, the average amount of the SALT deduction in 2018 dropped to $9,700 since the new cap limits the deduction to $10,000. Respectively, in New Jersey, taxpayers typically deducted $20,400 for state and local taxes in 2017 compared to $9,700 in 2018 tax year. In fact, in 26 states, the average SALT deduction was higher than the $10,000 cap. This means that taxpayers in these states were most impacted by the new cap since they are not allowed to deduct more than $10,000 paid on state and local taxes.
See below how every state was impacted by the new cap:
Five hundred counties had an average amount of SALT deduction above the $10,000 limit in 2017
At the county level, the share of taxpayers who deducted their state and local taxes varied from 0% to 34% in 2018. Loudoun County, VA, Falls Church City, VA and Charles County, MD were the counties with the most taxpayers claiming the SALT deduction in 2018. Specifically, 34% of the taxpayers in Loudoun County, VA deducted their state and local taxes followed by Falls Church City, VA (33%) and Charles County, MD (33%).
However, far more taxpayers used the SALT deduction in 2017. For instance, in Delaware County, OH, the share of taxpayers claiming the SALT deduction dropped by 35% to 17% in 2018 from 52% in 2017. Hunterdon County in New Jersey and Waukesha County in Wisconsin are a couple of counties where the share of taxpayers dropped more than 32% in 2018. From a financial standpoint, nearly 500 counties had an average amount of SALT deduction higher than the $10,000 cap in 2017. Thus, due to the cap, taxpayers in these counties had to deduct a much lower amount than what they paid for their state and local taxes. For example, the average amount of SALT deduction was $43,050 in Marin County, CA in 2017. However, the typical taxpayer in Marin County, CA deducted $10,000 in 2018.
See here the impact of the cap for every county across the country.
While the cap on SALT deduction is scheduled to expire at the end of 2025, it's noteworthy that this provision is not adjusted for inflation, which means that the impact on taxpayers would be even larger over time.
