Smart Tax Planning

This tax break may resurface in the next coronavirus bill – and CPAs are dreading it

Key Points
  • House Speaker Nancy Pelosi floated the idea of bringing back the state and local tax deduction for 2018 and 2019 in an interview with The New York Times.
  • Starting in 2018, the Tax Cuts and Jobs Act limited the SALT deduction to $10,000 per household.
  • About 16 million taxpayers claimed the SALT deduction for the 2018 tax year, according to the IRS’ analysis of returns processed through Nov. 21, 2019. That’s down from 44.3 million during the 2017 tax year.
Rowan Jordan

The next coronavirus relief bill might resurrect the state and local tax deduction – and overburdened accountants are less than thrilled.

In an interview with The New York Times, House Speaker Nancy Pelosi, D-Calif., raised the prospect of retroactively reinstating the so-called SALT itemized deduction in a fourth coronavirus relief bill to put more cash in the pockets of Americans.

The Tax Cuts and Jobs Act capped the amount of state and local tax deductions itemizers could claim on their tax returns to $10,000 starting in 2018 – a change that hit high earners in high-tax states in the wallet.

SALT deductions include income and property taxes. New Yorkers who itemized deductions in 2017 and claimed a SALT write-off took an average deduction of $23,804, according to the Tax Policy Center.

The White House isn't planning for another COVID-19 bill, so the prospect of such legislation is uncertain at the moment.

President Trump on coronavirus economic response: We're moving tax filing day to July 15

However, if the SALT cap were rolled back retroactively, per Pelosi's suggestion, accountants would have to talk to clients about amending their 2018 and 2019 tax returns – which would only add more work to the heap as they digest fresh COVID tax relief measures and a new July 15 deadline for federal returns.

Worse yet, amended returns must be printed out, manually signed and mailed to the IRS – an added pain when jurisdictions are ordering residents to stay home to minimize the spread of the coronavirus.

"We'll have a tax season that runs through Dec. 31, and I can't complain because it's a lot of business for us," said Dan Herron, CPA and principal at Elemental Wealth Advisors in San Luis Obispo, California.

If anything, a SALT deduction comeback would be a positive development for Herron's clients — many of whom were unable to write off steep state income and property taxes in 2018.

"But I wish they did it all at once, instead of going piecemeal," he said. "You don't want clients paying multiple times for multiple amendments."

Herron's practice, which has three professionals preparing returns, is limiting the workday to 10 hours to keep workers from burning out.

Tax overhauls            

Reps. Gottheimer and Reed on the bipartisan push to appeal SALT deducation cap

About 16 million taxpayers claimed the SALT deduction for the 2018 tax year, according to the IRS' analysis of returns processed through Nov 21, 2019. That's down from 44.3 million households in the 2017 tax year.

The Tax Cuts and Jobs Act turned the filing process upside down for filers in high-tax states in two major ways.

First, the new law roughly doubled the standard deduction, bringing it to $12,000 for singles and $24,000 for married filers in the 2018 tax year. This resulted in fewer people taking itemized deductions like the SALT deduction.

Second, the law instated a $10,000 cap on the extent you could write off those state and local income and property taxes.

"Here in Texas, we have huge property tax bills, and many clients weren't able to get over the itemized deduction threshold," said Brian Streig, CPA and tax director at Calhoun Thomson and Matza in Austin, Texas.

Even he switched to taking the standard deduction from claiming itemized deductions.

With all of the last-minute changes to the filing deadline for this year, as well as new small business and retirement provisions in the COVID relief bill, Streig has had many clients go on extension for their tax returns.

This gives them until Oct. 15 to submit their federal tax returns, but their taxes must be paid by July 15.

Hassle of amended returns

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While filing an amended return can be a boon for taxpayers and professionals, there's no denying the headache of redoing two years' worth of returns — especially at a time when federal and state governments are making rapid-fire changes to the tax codes.

"It's a couple button presses to pick up a Form 1040x, move the numbers and add one thing or take something off," said Dave Du Val, enrolled agent and chief customer advocacy officer at TaxAudit.

"But it's the time and the expenses, and the taxpayer is under the impression that you'll do it for free because it's not his fault the law has changed," he said.

"Some will do it, but most won't, said Du Val. "They expect to get paid for their work like everyone else."

More from Smart Tax Planning:
Tax Day is July 15. Why you should get your return in sooner
Where to get your tax return done for free
Why your tax return may spark interest from the IRS