Which of the following statements is true regarding the itemized deduction for state and local taxes?
A.The $10,000 limitation has been repealed.
B.The $10,000 limitation has been made permanent.
C.The $10,000 limitation has been increased to $50,000.
D.The deduction is limited to $10,000.
The correct answer and explanation is:
The correct answer is D. The deduction is limited to $10,000.
The Tax Cuts and Jobs Act (TCJA), enacted in 2017, imposed a cap on the amount of state and local taxes (SALT) that can be deducted for federal income tax purposes. Specifically, the law limits the combined total of state and local property taxes, income taxes, and sales taxes to a maximum of $10,000 for individual taxpayers. This $10,000 limitation applies whether the taxes are for state income taxes or property taxes.
Before the TCJA, there was no cap on SALT deductions, and taxpayers could deduct the full amount of state and local taxes paid. The new $10,000 limit was introduced as part of a broader effort to simplify the tax code and reduce the overall amount of deductions available to high-income earners. The limitation also affects both single and married taxpayers, with the $10,000 cap applying to each filing status.
It is important to note that this $10,000 limit was scheduled to expire in 2025. However, as of now, no change has been made, and the limitation is still in place for the tax years following the TCJA. This cap has been particularly contentious for taxpayers in high-tax states, where state income and property taxes can significantly exceed the $10,000 threshold, thus limiting the amount that can be deducted.
While there have been discussions and proposals to repeal or increase this limit, the current law still limits the SALT deduction to $10,000 per year, and there has been no increase to $50,000 or repeal of the limitation.