The SALT deduction limit has been a hot topic recently.

Some say it makes federal tax burden more uniform across states and makes the tax code cleaner / simpler / more fair. Others say it unfairly burdens those in states with high income taxes and high property taxes – Or that it even hurts the middle class especially in those high tax states.

Does the SALT deduction limit impact middle-class households? Should it be increased or repealed, or is it fine as is?

Let’s explore.

A recent Jonathan Swan interview of Bernie Sanders described the SALT deduction as “a tax people for rich people in blue states.”

A clip of this interview went a bit viral on Twitter and the comments are interesting (and enlightening.)

They say don’t read the comments, but I learned a lot doing so and it led me to the following analysis.

SALT deduction limit background

The Tax Cuts and Jobs Act of 2017 placed a $10,000 cap on State and Local Tax (SALT) deductions. Previously the deduction was unlimited.

To be impacted by the limit, 3 things must be true:

  • You pay more than $10,000 in State and Local Taxes (or you haven’t reached the limit, obviously)
    • State income tax
    • Property taxes
  • You have total deductions that exceed the standard deduction (else you would just claim the larger standard deduction)
    • $25,100 for Married filing Jointly in 2021
    • $12,550 for Single
  • Your tax burden under the TCJA must be greater than it would have been under prior tax law

The first 2 generally apply only to homeowners with a mortgage living in a State with both high income tax and high property taxes.

Two examples

Let’s look at 2 examples involving married couples earning $400,000 per year, one living in New Jersey and the other in California. This is the 98th percentile for US households in 2020 (only 2% earn more.)

They both own homes worth $1.6 million and have mortgages at the 3% interest rates.

This buys you either an “absolutely enchanting” 1 bedroom 1 bath 636 sq. ft. house in Palo Alto, CA, or a “spectacular 2300 sq. ft. brownstone on one of the prettiest tree-lined streets” in Hoboken, New Jersey.

Palo Alto, California

Hoboken, New Jersey

Here we come across the first change from the TCJA. Pre-TCJA it was possible to deduct interest on a mortgage up to $1 million. Now that ceiling is $750k. At 3% interest rates, this alone reduces deductions by ~$7,000/year for a deduction of ~$20,000 on $750,000.

The SALT deduction cap also raises its head here. The California couple would pay state income tax and local property taxes of ~$41,000. The New Jersey example would pay ~$61,000. However, they are both able to deduct only $10,000.

All totaled we get itemized deductions of about $30,000, which is ~only 20% more than the standard deduction of $25,100 (2021.) Imagine… paying $95k + in mortgage interest, property taxes, and state income taxes, and all you get for it is a lousy extra $5k deduction.

TCJA w/ SALT limitCaliforniaNew JerseyNotes
Income$400,000$400,000Married filing jointly
Home value$1,600,000$1,600,00020% down, 3% 30-year fixed mortgage
Mortgage interest$34,060$34,060average annual interest in 1st 10 years
Property taxes$10,560$40,160CA: 0.66%
NJ: 2.51%
State income tax$30,657$21,313
Itemized deductions$29,958$29,958Total, approximate
Mortgage interest$19,958$19,958Interest on $750k only
(state and property tax)
Taxable income$370,043$370,043
Federal tax$80,067$80,067tax tables only
~20% effective rate
Federal tax
(Standard deduction)

It takes some significant expenditure to make itemizing worthwhile, which is why the TCJA resulted in far fewer tax filers doing so.

“By increasing the standard deduction and limiting certain itemized deductions, the TCJA reduced the percentage of taxpayers that itemize and limited how much the tax code can award tax relief to taxpayers who spend in particular ways.” (source)

Now when losing tens of thousands of dollars of deductions, you might think that this would increase tax burden significantly. And you would be right.

Using the tax tables and the standard deduction, with $400k income the IRS would collect federal tax of $81,622, an effective tax rate of about 20%.

With an extra $5k deduction as a result of itemizing, total tax would be reduced to $80,067… a savings of $1,555.

By contrast, pre-TCJA with full deductions for interest on a $1 million mortgage and no SALT limits, using the standard tax tables the California household would pay federal tax of ~$45,000, and the New Jersey couple would pay ~$38,000. Which is about HALF!

But… another change from the TCJA was an increase in exemptions and phase-out thresholds in the Alternative Minimum Tax. The AMT is a way for the government to ensure households don’t get too many deductions by… eliminating SALT deductions, amongst other things.

With the TCJA, neither household would be impacted by the AMT. Pre-TCJA, however, the AMT would push total tax burden to $82,500 for both households, which by my math is MORE than what they pay under the TCJA.

pre-TCJACaliforniaNew JerseyNotes
Income$400,000$400,000Married filing jointly
Home value$1,600,000$1,600,00020% down, 3% 30-year fixed mortgage
Mortgage interest$34,060$34,060average annual interest in 1st 10 years
Property taxes$10,560$40,160CA: 0.66%
NJ: 2.51%
State income tax$30,657$21,313
Itemized deductions$67,827$88,083Total, approximate
Mortgage interest$26,610$26,610Interest on $1,000,000
(state and property tax)
$41,217$61,473NOT capped
Taxable income$312,216$291,960
Federal tax$44,863$38,178tax tables only
CA: ~11% effective rate
NJ: ~9.5%
AMT$82,437$82,437~20.6% effective

But wait… it gets even better.

Pre-TCJA, the Child Tax Credit was $1,000/child and phased-out starting at an AGI of $110,000 for MFJ. Now (you guessed it) the phase-out begins at an AGI of $400,000 and the CTC is worth $2,000/child ($3,000+ in 2021.)

Pre-TCJA a household would benefit by ~$1,400/child from having an extra exemption at the 33% marginal rate. Post TCJA that benefit is $600 higher.

Without a doubt these households benefit from the TCJA (albeit modestly.)

Why are people complaining about the SALT deduction limit?

There is a lot of press recently about how the SALT deduction limit is hurting the middle class.

My opinion…

If prior to the TCJA you could write a very large number in the deduction box for state and local taxes but now you can only write $10,000, you probably feel a bit miffed.

But looking solely at this box is a bit myopic – marginal tax rates were reduced across the board, the child tax credit was expanded, and the AMT was largely eliminated for all but the highest earning households.

Therefore, even those impacted by SALT caps paid less tax.

Here is an example from “high tax” New York – if you made less than $1 million, you federal tax burden decreased (more on this later.)

But if you are in that $1+ million income bracket and you paid 27% of income in federal tax instead of 26.5% and you have a congressperson who owes you a favor, then the best thing you can do is aggressively market that the SALT deduction limit is hurting the middle class. It certainly has better optics than “I can’t deduct all of my million dollar mortgage anymore” and “Can you believe the AMT no longer increases by taxes by 10s of thousands of dollars?!” or “I could never get the Child Tax Credit before because I make so much money, but this year the IRS gave me $4,000!”

But another reason we hear that the SALT deduction limit hurts the middle class is because, unfortunately, in some cases it is true.”

Middle Class SALT deduction limit impact

For most people in most places, the SALT deduction limit is a non-issue. This is clear from this CRFB analysis of who would benefit from a repeal.

Clearly most of the benefit goes to “the wealthy and the powerful.”

But some benefit goes to those making $50k+, and since the numbers in this chart are averages… some middle-class people would get a bigger benefit.

For example, on Long Island. In Nassau county, the median income is ~$120k and the median house price is $575k. These are just the numbers that come up on Google. (The median household income for the country is ~$68k. 75th percentile household income in 2020 was ~$120k.)

The property tax rate in Nassau county is high at 2.21% – the property tax bill on the median property is $12,700/year, so the SALT cap has an impact even before State income taxes.

If you have kids and benefit from the Child Tax Credit, you pay less federal tax. But if you don’t… often times you pay more. I modeled this extensively, and in the income range from $100k-$150k the tax curves cross over multiple times with a deviation of $500 +/-.

At the $120k income level using the standard deduction, a MFJ household might pay $12,375 in federal tax. Where most households in the country pay less, maybe you, a Long Island resident, pay $500 more. (But if you no longer itemize, maybe you do your taxes yourself instead of paying somebody $500?)

This house will probably sell for $575k. Is it a middle-class home at 2 bedroom, 2 bath, 1,165 sq. ft?

A Median home in Nassau county, Long Island, NY

Fix the SALT limit?

There are some issues with the SALT deduction limit – does it need to be fixed? Or are property taxes and state taxes special expenses that deserve special treatment by the tax code? That is a matter for debate over a few beers, or perhaps in the comments…

Some things to consider:

More middle class households are likely to be impacted somewhat by the limit over time as the $10,000 threshold is not indexed for inflation. In 2021 the value of $10k is already 4.5% lower than it was in 2018 when the TCJA was passed, and it is unlikely that anybody has lower property tax bills. I suspect this is by design so the trend is towards fewer people itemizing.

Married households are far more likely to be impacted – the $10k limit is per tax return not per person. Making the limit per person would be more in line with the rest of the tax code. Change the per person value accordingly.

That most middle-class households have had their tax burden reduced by the TCJA, is it fair that childless households in states with high income taxes and high property taxes may have a higher federal tax burden? Or is a more uniform tax code more appropriate?


The TCJA disincentivized itemizing by increasing the standard deduction and limiting certain itemized deductions (e.g. SALT.) This means federal tax burden is more uniform across States – a household in California making $x will pay the same amount of federal tax as a household in New Jersey or Tennessee or Alaska, more often than not.

Despite the limit to SALT deductions, most households across the income spectrum saw federal tax burden decrease with the TCJA. In fact, many who are upset that they can no longer deduct 10s of thousand of dollars in state and local taxes actually pay less tax than pre-TCJA thanks to reduced marginal tax rates, an expanded child tax credit, and changes to the Alternative Minimum Tax.

There are some exceptions – very high income households in states with high income tax and high property taxes, and some middle class households in those same states.

What should be done with the SALT limit?