The state and local tax (SALT) deduction allows taxpayers of to deduct state and local tax payments on their federal tax returns. The tax plan signed by President Trump in 2017, called the Tax Cuts and Jobs Act, instituted a cap on the SALT deduction.
On Monday, April 18, 2022, the United States Supreme Court declined to hear New York, New Jersey, Connecticut and Maryland’s plea to reverse the federal cap on state and local tax deductions that was instituted under former President Donald Trump’s signature tax plan.
The U.S. Supreme Court turned down the case in which states argued that the $10,000 federal cap on state and local tax deductions was coercive in violation of the U.S. Constitution’s 10th and 16th amendments. Further, the states claimed that the cap harmed states with higher state and local tax burdens by increasing their residents’ federal tax bills and effectively raising the cost of home and property ownership.
Federal lawmakers have been debating over the last year whether to actually increase the cap, but have been unable to reach an agreement on such a proposal, partly because lawmakers on both sides of the aisle have agreed that a higher deduction would primarily benefit high-earners. It is worth noting that, absent further legislation, the SALT deduction cap will sunset at the end of 2025.
In its legal filings, Treasury acknowledged that if the cap was viewed in isolation, its limitation may increase the federal tax liability of certain individuals who reside in the states challenging the provision. Nevertheless, states are free to address their own tax policy, and more than 20 states, including North Carolina, have put pass-through entity tax workarounds in place after the Internal Revenue Service and Treasury issued guidance indicating they would be a permissible method to bypass the cap. Pass-through entities include S corporations, partnerships, and limited liability companies taxed as partnerships or S corporations.