Benefits of SALT Cap Repeal May Be Mixed for Rich Clients | FA Magazine
By Jeff Stimpson | February 9, 2021
Some lawmakers are trying to remove the $10,000 limit on a tax deduction for state and local taxes (SALT) as part of an upcoming relief package. The limit, part of 2017 tax reform, has sometimes been blamed for a perceived migration from high-tax states.
“The limitation has seemed to be one of the most unpopular provisions of the Tax Cuts and Jobs Act, especially in states such as New Jersey, New York, Connecticut and California,” said James G. McGrory, shareholder at Drucker & Scaccetti in Philadelphia. He added that many states have enacted or are considering workarounds. “It’s not surprising that with a new president and a change in the balance of Congress that efforts are being undertaken ... to repeal the cap.”
Unlike with many tax proposals, there is some bipartisan support for this idea, said Larry Pon, a CPA in Redwood City, Calif.
“The criticism for this repeal comes from some legislators who complain the repeal will benefit the rich because they pay higher state and local taxes,” Pon said. He’s also been hearing about the cap from apprehensive clients for three years. “Nearly all my clients have more than $10,000 in SALT deductions. ... But California has not adopted the TCJA, so ... the full amount of property tax deductions are still deductible on the state return.”
The proposed repeal remains a longshot, but if passed it could influence wealthy clients’ tax and lifestyle decisions. But should it?
“The effect hinges on whether it applies to all taxpayers or only those over a certain taxable income threshold,” said Jim Bertles, managing director at Tiedemann Advisors in Palm Beach, Fla. “The Biden administration’s latest tax plan suggests that income taxes will still likely rise for top income earners, and we’ve found that our clients are more concerned about these increases rather than the potential SALT repeal.”
“Any reduction in or elimination of the SALT limitation would likely be offset to some extent by an increase in income or capital gains tax rates,” he added.
That’s just one factor to bear in mind before changing homes because of a tax deduction. McGrory, for instance, wonders about any corresponding change to rules of the alternative minimum tax [AMT], which often affects wealthy clients.
“Prior to tax reform, many of our wealthy clients had significant SALT deductions for federal income tax purposes,” he said. “But SALT paid is a preference item or add-back for the AMT, so those clients didn’t really get a full federal income tax benefit of their SALT deduction.”
“For AMT purposes, there currently is no tax deduction for SALT, including real estate taxes,” said Cindy Ostrager, managing director and Director of Tax at Clarfeld Citizens Private Wealth in Tarrytown, N.Y. “While other clients did lose their full SALT deduction, the reduction in the top federal income tax rate helped to reduce or eliminate the increase altogether.”
As with many high-profile tax changes, affects can be illusionary. “Clients like to see that big deduction on Schedule A. They don’t grasp that the deduction was meaningless due to the AMT,” Pon added. “If the SALT limitation is repealed, how about the AMT preference? Is that going to come back? Will the AMT exemptions be reduced to pre-TCJA levels?
“Since the passage of the TCJA, I’ve shown my clients how much their taxes have been reduced due to the TCJA even with the SALT limitation,” Pon said. “When before the TCJA nearly all clients paid AMT due to the SALT deduction, very few pay AMT now because there is no longer that large preference amount.”
“Most of our ultra-wealthy clients do not make decisions based on income taxes alone,” Ostrager said. “Our client base has the luxury of making lifestyle decisions based on many factors without taxes as the main driver.”