House and Senate Consider Bills to Alter State and Local Tax Deduction Limit

Lawmakers from states most affected by the $10,000 limit on deductions for state and local taxes imposed by the Tax Cuts and Jobs Act (TCJA) have introduced legislation to reduce or suspend the limit. However, it is unlikely that such legislation will be enacted.

In the U.S. House, the Ways and Means Committee on 11 December 2019, approved H.R. 5377 and sent it to the full House. The bill would double the allowable deduction (from $10,000 to $20,000) for married couples filing jointly in 2019. Currently, both married joint filers and individuals have the same $10,000 limit. It would also repeal the limit for 2020 and 2021. In addition the bill would increase from $250 to $500 the above-the-line deduction currently allowed for expenses of educators, and extend the deduction to first responders.

The bill would be paid for by increasing the top rate of tax from the TCJA’s 37% to 39.6% through 2025. The rate is currently scheduled to revert to 39.6% after 2025.

The bill attracted no Republican votes, and its consideration by the full House is uncertain. However, Republicans in the Senate object to the raise in the top rate as well as the educator provision, and are extremely unlikely to approve it if it does pass the House. Moreover, many legislators and others argue that the bill primarily benefits high-income taxpayers. A new report by the Center of Budget and Policy Priorities, a centrist think tank, says that the bill would “overwhelmingly benefit high-income households” and suggests more modest changes such as increasing the limit somewhat.

S. 2762, a bill introduced in the Senate by Senator Collins (R-Maine) would, like H.R. 5377, increase the limit to $20,000 for married taxpayers filing jointly, but omits the other provisions. That bill would be effective for 2019 and later years through 2025. Again, no action on that bill is likely in 2019, but it has a better chance of eventual passage.

Finally, on 26 November 2019, New York, Connecticut, Maryland and New Jersey appealed to the U.S. 2d Circuit Court of Appeals a 30 September U.S. District Court ruling that upheld the constitutionality of the limit. Arguments will he scheduled for 2020, but most observers doubt whether the states can prevail.

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How This Impacts Mobility

Worldwide ERC® members have increased gross-ups due to higher taxes incurred by some mobile employees due to the limit, and would benefit from its alteration or repeal.

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