Bill chips away at SALT block but comes with drawbacks, advisors say

Joanne Burke of Birch Street Financial Advisors and Tim Steffen of Robert W. Baird & Co.

'I’d love to see the [full] SALT deduction come back but not if it means rates go up,' one advisor says.

Legislation that would raise the limit on state and local tax deductions for some taxpayers chips away at a frustrating SALT block but would come with some drawbacks, financial advisors say.

Republican members of the House of Representatives recently introduced a bill, the SALT Marriage Penalty Elimination Act, that would increase the deduction for state and local taxes to $20,000 for couples earning less than $500,000 in the 2023 tax year.

The bill, written by lawmakers from New York, California and Maryland, seeks to restore at least some of the SALT deduction that was capped at $10,000 in the Tax Cut and Jobs Act, which was signed into law in 2017.

The SALT limitation helped generate revenue to pay for many individual and corporate tax breaks contained in the 2017 measure. But it also produced a strong backlash from Republicans and Democrats in states with high income taxes, such as New York, California and New Jersey.

Advisors generally like the idea of raising the limit on the SALT deduction.

“While it’s not the SALT limit lift we’d like to see, it certainly makes it equitable between single and married-filing-joint filers, especially when you look at it in light of state income tax on earnings,” Joanne Burke, owner of Birch Street Financial Advisors in Vienna, Virginia, wrote in an email. “Under the current scenario, there’s a marriage penalty for the SALT cap.”

Tyler Whitehouse, managing director for personal wealth at RMR Wealth, said boosting the SALT deduction limit would help many of his clients. His firm is based in Montclair, New Jersey.

“I would love to have SALT get raised to $20,000, if not higher,” Whitehouse said.

One of the drawbacks of the bill, however, is that it provides the SALT deduction increase retroactively to the 2023 tax year, which limits its usefulness for financial planning. Some clients may already have made tax strategy decisions for 2023 that can’t now be undone.

“There’s nothing I can do to go back and take advantage of [the deduction increase],” said Tim Steffen, director of advanced planning at Robert W. Baird & Co. “All it is is a handout to people in high-tax states whose income is below the threshold.”

The notion of a retroactive tax break can create tax-planning challenges for advisors. For instance, some advisors might want to wait and see what happens to the bill before they file taxes for clients who would qualify for the higher deduction.

“If we think it’s going to pass, even if I finish a return, I would just hold it,” said Richard Pon, an advisor and CPA in San Francisco.

The prospects for the bill are murky. It was introduced just before the House passed overwhelmingly a bipartisan tax bill that renews some expired small-business tax breaks from the 2017 law and increases the child tax credit.

It’s unclear whether the SALT bill can be attached to the larger bill. That’s in addition to questions about whether the larger bill can get through the Senate, and whether the SALT legislation can be added to other must-pass legislation or draw bipartisan support and move on its own. The House could take up the SALT bill during the week of Feb. 12.

A spokesperson for one of the authors of the SALT bill, Rep. Michael Lawler, R-N.Y., did not respond to a request for comment.

Pon isn’t optimistic about the legislation’s chances.

“With all the fighting between the House and Senate, I don’t think anything is going to pass,” he said.

Raising the SALT deduction can’t happen in a vacuum. Doing so could change the equation for the individual tax breaks contained in the 2017 law that expire at the end of next year. If the reductions in individual rates and the increase in the estate tax exemption are renewed, the SALT deduction-limit may once again be important to pay for those provisions.

“I’d love to see the [full] SALT deduction come back but not if it means rates go up,” Steffen said.

Election results in November will determine political control of the White House and Congress, which will influence the fate of the expiring tax breaks.