Inflation Is Making the SALT Deduction Less Sweet

As Democrats haggle over the future of the controversial state and local tax deduction, it's worth remembering that the current cap of $10,000 isn't adjusted for inflation.

That was by design when Republicans rewrote the tax rules in 2017 and removed what had previously been an unlimited SALT deduction. And it wasn’t a novel move; there are other deductions and credits in the tax code that don't take inflation into account. For example, the deduction taxpayers are allowed to take for the mortgage interest they pay is also capped at a non-inflation-adjusted amount for debt up to $750,000. And the amount of stock losses a taxpayer can deduct against ordinary income has been set at $3,000 for at least four decades.

In an environment of higher-than-expected inflation, the deductions and credits that aren't inflation-indexed become less attractive as their value declines.

By contrast, the standard deduction, which is a flat amount taxpayers take to reduce their taxable income rather than itemizing individual deductions such as SALT and mortgage interest, adjusts for inflation every year. With prices rising at the fastest rate in three decades, it just had its biggest jump in several years. In 2022, married couples get a standard deduction of $25,900, up from $25,100 this year.

The Internal Revenue Service updates these figures annually, along with the income thresholds for tax brackets and other deductions and credits, according to set formulas.

Republicans nearly doubled the standard deduction in 2017, which is why an estimated 90% of taxpayers take it compared to 70% before the change. If Democrats end up leaving the $10,000 cap in place, more taxpayers in high-tax states are likely to start using it if inflation continues. That’s the target audience for the benefit Democrats are trying to give them by shrinking the SALT-deduction limit.

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