Watchdog: Nearly 11 million taxpayers may be subject to limit on key deduction

Nearly 11 million taxpayers may be subject to the limits on the state and local tax (SALT) deduction in President Trump’s tax law, a Treasury Department watchdog estimated in a report released Tuesday.

The Treasury Inspector General for Tax Administration (TIGTA) estimated that if the $10,000 cap on the deduction had been in place in 2017, roughly 10.9 million taxpayers would have been unable to deduct about $323 billion in state and local tax payments on their federal tax forms.

TIGTA said that its estimate is based on examining 2017 tax filings whose itemized deductions exceed the standard deduction amount under the new tax law and identifying the number of returns that claimed more than $10,000 in SALT deductions.

Those who have claimed more than $10,000 in SALT deductions in the past may still be seeing a reduction in their tax liability under Trump’s tax law. Some taxpayers are likely to have their limit on SALT deductions more than offset by the 2017 tax law’s lower tax rates and larger child tax credit. And some taxpayers had their SALT deduction limited in the past by the alternative minimum tax but won’t be paying that tax under the new tax law.

However, in some cases, taxpayers are seeing an increase in their taxes largely because of the SALT deduction cap.

The SALT deduction cap is one of the most controversial parts of Trump’s 2017 tax law. Politicians on both sides of the aisle in high-tax states such as New York, New Jersey and California have been arguing that the cap disproportionately hurts their residents. 

Blue-state politicians have amplified their calls to restore the full SALT deduction in the past few weeks, linking the cap on the SALT deduction to complaints from taxpayers about smaller refunds and higher taxes.

Trump has also expressed openness to revisiting the cap on the SALT deduction. But key congressional Republicans said they do not plan to reconsider the deduction cap, which largely impacts high earners.

TIGTA’s estimate was included in a report reviewing a notice the IRS issued last spring indicating that it was going to issue regulations on blue-state workarounds to the SALT cap. Most of the report was redacted, but TIGTA said in the highlights page of its report that it found the review and approval process for the IRS notice to be reasonable.