SALT Tax Deduction Max of $10K is NOT indexed to Inflation

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WolfgangPauli
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SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by WolfgangPauli » Sun Dec 31, 2017 11:28 pm

Anyone else see this little gem in the new tax code? This is not indexed to inflation and if you assume inflation is going to heat up a bit very quickly this $10k is going to be small for a lot of people. As your local taxing authorities need to raise more funds with inflation, you will always be at $10K.

Just a FYI in case you missed it.
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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by Gray » Mon Jan 01, 2018 12:19 am

“Will always be” is a bit strong.

Let’s check this space in mid-2021. My money is on that there will be changes to the tax legislation, whether regarding the SALT deduction or other details which will have impacted tax payers filing for three tax years by then. In any case, much of this bill becomes a pumpkin in 2025, so we know Congress will need to revisit it.

Another change is the use of Chained CPI for adjusting tax brackets which will move them higher more slowly. This is more of a boil the frog slowly kind of change.

Point taken on the fact the $10k is not indexed.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by DrGoogle2017 » Mon Jan 01, 2018 12:26 am

I think it’s by design.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by hoppy08520 » Mon Jan 01, 2018 11:24 am

Another flaw is that the $10k SALT cap is the same whether single or married. So, Congress basically instituted another marriage penalty.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by stan1 » Mon Jan 01, 2018 11:36 am

WolfgangPauli wrote:
Sun Dec 31, 2017 11:28 pm
As your local taxing authorities need to raise more funds with inflation, you will always be at $10K.
Taxes rates don't need to be increased. As incomes and realized capital gains go up so do the amount of state and local income taxes paid and in general as property values go up so do assessments (or a small upward adjustment in California).

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by mariezzz » Mon Jan 01, 2018 11:44 am

DrGoogle2017 wrote:
Mon Jan 01, 2018 12:26 am
I think it’s by design.
Yes, it was done very strategically, at many levels.

Even in 2018, it will hit hardest people who live in areas where property/income/sales taxes are higher to pay for better schools, roads, fire, police, other public services,salaries of public employees, etc. It especially hits those who live in areas where housing costs are higher (as total mortgage interest paid property taxes tend to be correspondingly higher). I'm not in an area with the highest taxes or the highest mortgages, but I calculated the loss of the exemption means I'll pay more in federal taxes.

Some at the upper-most incomes may come up with tax (or other) strategies to offset the difference on personal taxes, but those in middle & upper-middle class will end up shouldering more of the overall federal tax burden. Over time, the burden will increase since the $10,000 max (not sure about $12K std deduction) isn't indexed to inflation. The one potentially positive aspect of this is that inflation will increase the pressure to revisit these changes.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by DrGoogle2017 » Mon Jan 01, 2018 12:31 pm

mariezzz wrote:
Mon Jan 01, 2018 11:44 am
DrGoogle2017 wrote:
Mon Jan 01, 2018 12:26 am
I think it’s by design.
Yes, it was done very strategically, at many levels.

Even in 2018, it will hit hardest people who live in areas where property/income/sales taxes are higher to pay for better schools, roads, fire, police, other public services,salaries of public employees, etc. It especially hits those who live in areas where housing costs are higher (as total mortgage interest paid property taxes tend to be correspondingly higher). I'm not in an area with the highest taxes or the highest mortgages, but I calculated the loss of the exemption means I'll pay more in federal taxes.

Some at the upper-most incomes may come up with tax (or other) strategies to offset the difference on personal taxes, but those in middle & upper-middle class will end up shouldering more of the overall federal tax burden. Over time, the burden will increase since the $10,000 max (not sure about $12K std deduction) isn't indexed to inflation. The one potentially positive aspect of this is that inflation will increase the pressure to revisit these changes.
I have different take from you. Eventually the standard deduction, which is indexed to inflation, will exceed the benefit of having itemized deductions. So it’s moot to itemize. Only if interest rate will rise in such a way that the interest on the mortgage on $750k mortgage exceeds the standard deduction will it make sense to itemize. I don’t know what interest rate, maybe 6%? The pressure will be on the state to hold down or decrease spending.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by mariezzz » Mon Jan 01, 2018 1:46 pm

DrGoogle2017 wrote:
Mon Jan 01, 2018 12:31 pm
mariezzz wrote:
Mon Jan 01, 2018 11:44 am
DrGoogle2017 wrote:
Mon Jan 01, 2018 12:26 am
I think it’s by design.
Yes, it was done very strategically, at many levels.

Even in 2018, it will hit hardest people who live in areas where property/income/sales taxes are higher to pay for better schools, roads, fire, police, other public services,salaries of public employees, etc. It especially hits those who live in areas where housing costs are higher (as total mortgage interest paid property taxes tend to be correspondingly higher). I'm not in an area with the highest taxes or the highest mortgages, but I calculated the loss of the exemption means I'll pay more in federal taxes.

Some at the upper-most incomes may come up with tax (or other) strategies to offset the difference on personal taxes, but those in middle & upper-middle class will end up shouldering more of the overall federal tax burden. Over time, the burden will increase since the $10,000 max (not sure about $12K std deduction) isn't indexed to inflation. The one potentially positive aspect of this is that inflation will increase the pressure to revisit these changes.
I have different take from you. Eventually the standard deduction, which is indexed to inflation, will exceed the benefit of having itemized deductions. So it’s moot to itemize. Only if interest rate will rise in such a way that the interest on the mortgage on $750k mortgage exceeds the standard deduction will it make sense to itemize. I don’t know what interest rate, maybe 6%? The pressure will be on the state to hold down or decrease spending.
I don't see how you conclude that. In my case, I'm much worse off than in 2018, because of the loss of the exemption + itemization I'll use in 2017. I'll pay about 10% more in federal taxes (even with the lower 12% tax bracket), compared to what I would have paid without these changes. The exemption and standard deductions have always been indexed to inflation, so I don't see how your argument makes sense. The tax change that got rid of the exemption isn't a benefit to me - and many others in similar circumstances. A few hundred more in taxes wouldn't be felt as much by someone in a higher tax bracket, where there's more disposable income (even with the higher taxes that go along with the higher tax bracket), but it's very much felt in a lower tax bracket.

Additionally, in 2017, there wasn't a $10,000 limit on SALT for itemization. That $10K is too low, and since the tax law changes don't index it to inflation, will get lower over time.

It would have been better to limit charitable deductions for itemization purposes (perhaps to $5K) and have a higher limit for SALT ($20K or so). That would have been better for more people, esp. middle & upper middle income people.

A lot of people's charitable deductions provide a fairly direct benefit to them because charitable deductions so often are made to places of one's own worship. $5K would provide room for the kinds of charitable contributions most can make, but not be excessive.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by engineer1969 » Mon Jan 01, 2018 2:32 pm

Generally speaking, those impacted by this change would have either large mortgage interest, real estate tax or both.

Most falling in this category and who make too little to absorb the extra costs are likely getting a huge reduction in tax rate due to the widening of the 24% (formerly 28%) bracket. Anyone with a 33% marginal rate is getting a big refund due to the reduction in rates. Those with lower marginal rates probably are not hit very hard by this new limit and will pay either slightly more or slightly less depending on their situation.

Likely, a 90% solution they came up with to make sure most saw some sort of reduction.

<changed 25% to 24%>

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by DrGoogle2017 » Mon Jan 01, 2018 2:41 pm

mariezzz wrote:
Mon Jan 01, 2018 1:46 pm
DrGoogle2017 wrote:
Mon Jan 01, 2018 12:31 pm
mariezzz wrote:
Mon Jan 01, 2018 11:44 am
DrGoogle2017 wrote:
Mon Jan 01, 2018 12:26 am
I think it’s by design.
Yes, it was done very strategically, at many levels.

Even in 2018, it will hit hardest people who live in areas where property/income/sales taxes are higher to pay for better schools, roads, fire, police, other public services,salaries of public employees, etc. It especially hits those who live in areas where housing costs are higher (as total mortgage interest paid property taxes tend to be correspondingly higher). I'm not in an area with the highest taxes or the highest mortgages, but I calculated the loss of the exemption means I'll pay more in federal taxes.

Some at the upper-most incomes may come up with tax (or other) strategies to offset the difference on personal taxes, but those in middle & upper-middle class will end up shouldering more of the overall federal tax burden. Over time, the burden will increase since the $10,000 max (not sure about $12K std deduction) isn't indexed to inflation. The one potentially positive aspect of this is that inflation will increase the pressure to revisit these changes.
I have different take from you. Eventually the standard deduction, which is indexed to inflation, will exceed the benefit of having itemized deductions. So it’s moot to itemize. Only if interest rate will rise in such a way that the interest on the mortgage on $750k mortgage exceeds the standard deduction will it make sense to itemize. I don’t know what interest rate, maybe 6%? The pressure will be on the state to hold down or decrease spending.
I don't see how you conclude that. In my case, I'm much worse off than in 2018, because of the loss of the exemption + itemization I'll use in 2017. I'll pay about 10% more in federal taxes (even with the lower 12% tax bracket), compared to what I would have paid without these changes. The exemption and standard deductions have always been indexed to inflation, so I don't see how your argument makes sense. The tax change that got rid of the exemption isn't a benefit to me - and many others in similar circumstances. A few hundred more in taxes wouldn't be felt as much by someone in a higher tax bracket, where there's more disposable income (even with the higher taxes that go along with the higher tax bracket), but it's very much felt in a lower tax bracket.

Additionally, in 2017, there wasn't a $10,000 limit on SALT for itemization. That $10K is too low, and since the tax law changes don't index it to inflation, will get lower over time.

It would have been better to limit charitable deductions for itemization purposes (perhaps to $5K) and have a higher limit for SALT ($20K or so). That would have been better for more people, esp. middle & upper middle income people.

A lot of people's charitable deductions provide a fairly direct benefit to them because charitable deductions so often are made to places of one's own worship. $5K would provide room for the kinds of charitable contributions most can make, but not be excessive.
I don’t think I made it clear in my post. I’m in the same boat as you, living in HCOL with high property tax. So when I lose out on deductions, I pay more tax. But what I meant to say, the tax law is by design so that most people will eventually take the standard deduction because it will be indexed to inflation, when the SALT tax is fixed. Right now I can still itemize, in a few years I might not. Interest rate has been low for a while and unless it goes up much higher, eventually people might not be able to itemize anyway.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by randomguy » Mon Jan 01, 2018 2:57 pm

stan1 wrote:
Mon Jan 01, 2018 11:36 am
WolfgangPauli wrote:
Sun Dec 31, 2017 11:28 pm
As your local taxing authorities need to raise more funds with inflation, you will always be at $10K.
Taxes rates don't need to be increased. As incomes and realized capital gains go up so do the amount of state and local income taxes paid and in general as property values go up so do assessments (or a small upward adjustment in California).
That was the point. 10% of 100k is 10k today. In 15 years 10k of 150k of would be 15k but you would only have a deduction of 10k. There are other places in the tax code (3k deduction for losses, 250k/500k for house sales, 200/250k ACA tax,...) that are not inflation adjusted. Maybe they will get adjusted. Maybe not.

And obviously it was intentional. It was the only way to meet the scoring goals needed. It is the same reason that a lot of stuff expires. It is basically a gamble that they can force future congresses to extend the cuts or do the unpopular thing of raises taxes.

And yes any type of tax reform is going to pick out a different set of winners and losers. It is very disruptive until you adapt to the new reality.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by FIREchief » Mon Jan 01, 2018 3:28 pm

engineer1969 wrote:
Mon Jan 01, 2018 2:32 pm
Generally speaking, those impacted by this change would have either large mortgage interest, real estate tax or both.

Most falling in this category and who make too little to absorb the extra costs are likely getting a huge reduction in tax rate due to the widening of the 24% (formerly 28%) bracket. Anyone with a 33% marginal rate is getting a big refund due to the reduction in rates. Those with lower marginal rates probably are not hit very hard by this new limit and will pay either slightly more or slightly less depending on their situation.

Likely, a 90% solution they came up with to make sure most saw some sort of reduction.

<changed 25% to 24%>
Many falling in this category are also likely benefiting from elimination of the AMT, which stripped all deductions for SALT and property taxes. I'm sure that some who are posting how much the new law will cost them have rigorously calculated the full impact on their own taxes. I'm equally sure that many others are relying on non-rigorous approaches that likely have little accuracy.
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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by Alex Frakt » Mon Jan 01, 2018 4:43 pm

This thread is on the verge of being locked. Please keep in mind that posts must be about the law as it is, rather than what we think it should be. Also posts must be personal and actionable. As stated in this forum's posting guidelines:
Note that topics must be directly connected to your (or your friend's or family's) financial life. General comments or complaints about these topics will be removed. If you aren't sure if a topic is OK, ask yourself these questions.

1) Does it relate to finance issues (but it's not an investing question)?

2) Is it personal? In other words, is it about you (or on behalf of someone specific).

3) Is it actionable? Can you do something with the replies that will make a difference in your financial life or the products or services you buy.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by Good Listener » Mon Jan 01, 2018 5:27 pm

Yes, please listen to Alex. This is a good thread so please let's not ruin it by being political. There is precedent in the tax code for some things being indexed to inflation and others not. I think that by law the brackets per se must be indexed. As pointed out here, the SALT was kept at 10K. Note that capital losses have been kept at 3K per year and not indexed to inflation "forever" or as long as I remember. Also note that the NII 3.8% tax put in with the Affordable Care act is not indexed and starts at 200K. So does the additional Medicare tax put in with the ACA that starts at income of 200K. Until very recently the Alternate minimum tax was not indexed and now it is, however I've heard experts say that with the new SALT limitation literally nobody will be in the AMT.

My point is not in defense or opposition to the provision, it is simply showing that indexing is not the necessary standard.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by TBillT » Mon Jan 01, 2018 6:40 pm

For 2018 many will move to the standard deduction due to this.
Some few of us will be trying to hang on to Itemizing, which may include me...not sure yet.
Got a few tricks up my sleeve but obviously maybe fiddling with mortgage/home purchases would allow max out on home interest.
Donations with appreciated stock may be more useful in the new code.

The thing I did year end was over-pay my 2017 state taxes a little bit to make sure I was not carrying that over to the next tax year.
Last edited by TBillT on Mon Jan 01, 2018 6:45 pm, edited 1 time in total.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by jeffyscott » Mon Jan 01, 2018 6:43 pm

It seems the $750,000 cap on mortgage interest deduction is also fixed, not indexed to inflation. So seems to be a design feature to slowly reduce some of the more popular tax subsidies.

The taxation of SS benefits is another thing that is not indexes and has, I believe, never been adjusted. I assume this was by design to slowly make more SS benefits taxable over time.
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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by CurlyDave » Tue Jan 02, 2018 1:38 am

jeffyscott wrote:
Mon Jan 01, 2018 6:43 pm
The taxation of SS benefits is another thing that is not indexes and has, I believe, never been adjusted. I assume this was by design to slowly make more SS benefits taxable over time.
Actually, the taxation of SS benefits has been adjusted many times over the years. You might not be old enough to remember, but before 1983 SS was not taxed at all. I wasn't drawing it then, but my grandfather was and income taxes, for all of the generations alive then, were a part of the family financial discussions we had as part of my financial education.

When people talk about a potential future means test for SS, they lose sight of the fact that taxing SS benefits is already means testing them. As is the medicare deductions.

* * * * * * * * *

The tax bill that passed is going to mean disruption for many of us, but I think we should withhold judgement on its virtue or lack thereof until we see all of the effects over a few years. The fool thing was 3000 pages. I am not going to read that -- I hire a CPA to do that for me. Life is too short for me to read the new tax law. Reading it would probably give me an apoplexy and really shorten my life...

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by jeffyscott » Tue Jan 02, 2018 7:48 am

CurlyDave wrote:
Tue Jan 02, 2018 1:38 am
jeffyscott wrote:
Mon Jan 01, 2018 6:43 pm
The taxation of SS benefits is another thing that is not indexes and has, I believe, never been adjusted. I assume this was by design to slowly make more SS benefits taxable over time.
Actually, the taxation of SS benefits has been adjusted many times over the years. You might not be old enough to remember, but before 1983 SS was not taxed at all. I wasn't drawing it then, but my grandfather was and income taxes, for all of the generations alive then, were a part of the family financial discussions we had as part of my financial education.

When people talk about a potential future means test for SS, they lose sight of the fact that taxing SS benefits is already means testing them. As is the medicare deductions.
I was aware that the benefits were not taxed prior to the early 1980s (and that the 85% threshold was added later), what I meant was that the base threshold for taxing SS benefits has been fixed for all that time. Checking, I see that is correct, the threshold was set at $25,000 single and $32,000 joint in 1983. Had they adjusted based on CPI, those thresholds would be about $63K and $81K today. This, as intended, has gradually increased the taxation of SS benefits.

In the same way if the provisions of the new tax rules are extended, 35 years from now the $10,000 limit on SALT may be equivalent to about $4000 today and the $750K mortgage limit may be equivalent to $300K today. With that, you'd have to have about a 7% mortgage rate to potentially benefit at all from itemizing, if your only deductions are mortgage interest and SALT. This is, I assume, intended to be a way of gradually phasing out the value of these deductions.
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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by CnC » Tue Jan 02, 2018 10:09 am

The point here is that eventually everyone will move to the standard deduction. Eventually.


I'm not going to guess or Inver any motives to why they did it the way that they did.


But the current 750k home limit and 10k salt limit act effectively like a bandaid. Since they are not indexed they will be outpaced by the standard deduction.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by Epsilon Delta » Tue Jan 02, 2018 11:23 am

jeffyscott wrote:
Tue Jan 02, 2018 7:48 am

... , what I meant was that the base threshold for taxing SS benefits has been fixed for all that time. Checking, I see that is correct, the threshold was set at $25,000 single and $32,000 joint in 1983. Had they adjusted based on CPI, those thresholds would be about $63K and $81K today. This, as intended, has gradually increased the taxation of SS benefits.
For background: Tax brackets were indexed in the Economic Recovery Tax Act of 1981. SS benefits were first taxed in the 1983 Amendments to the Social Security Act. Harlon's razor says this isn't proof it was intentional, but it is suggestive.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by bsteiner » Tue Jan 02, 2018 11:32 am

Epsilon Delta wrote:
Tue Jan 02, 2018 11:23 am
... Tax brackets were indexed in the Economic Recovery Tax Act of 1981. SS benefits were first taxed in the 1983 Amendments to the Social Security Act. Harlon's razor says this isn't proof it was intentional, but it is suggestive.
Without indexing, the high inflation of the 1970s pushed people into higher brackets. By 1980 a couple filing a joint return was in the 49% bracket at $45,800 of taxable income: https://files.taxfoundation.org/legacy/ ... ominal.pdf. Indexing was enacted so that Congress wouldn't have to act to offset the impact of inflation on tax brackets.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by susze » Tue Jan 02, 2018 6:19 pm

engineer1969 wrote:
Mon Jan 01, 2018 2:32 pm
Generally speaking, those impacted by this change would have either large mortgage interest, real estate tax or both.

Most falling in this category and who make too little to absorb the extra costs are likely getting a huge reduction in tax rate due to the widening of the 24% (formerly 28%) bracket. Anyone with a 33% marginal rate is getting a big refund due to the reduction in rates. Those with lower marginal rates probably are not hit very hard by this new limit and will pay either slightly more or slightly less depending on their situation.

Likely, a 90% solution they came up with to make sure most saw some sort of reduction.

<changed 25% to 24%>
Does the SALT deduction of 10k cap expire after 10 years? Does anyone know definitively?

I know anything can change between now and then and with new legislation, dont want to discuss because its impossible to know and also per forum rules. only want to know if current law has it expiring.

Thanks

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by dwickenh » Tue Jan 02, 2018 6:24 pm

DrGoogle2017 wrote:
Mon Jan 01, 2018 12:26 am
I think it’s by design.
Along with the lack of Inflation correction to the SS tax brkts.
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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by WolfgangPauli » Tue Jan 02, 2018 8:34 pm

hoppy08520 wrote:
Mon Jan 01, 2018 11:24 am
Another flaw is that the $10k SALT cap is the same whether single or married. So, Congress basically instituted another marriage penalty.
I wonder when it really will be a significant enough benefit to just get divorced and live together..
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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by triceratop » Tue Jan 02, 2018 8:56 pm

WolfgangPauli wrote:
Tue Jan 02, 2018 8:34 pm
hoppy08520 wrote:
Mon Jan 01, 2018 11:24 am
Another flaw is that the $10k SALT cap is the same whether single or married. So, Congress basically instituted another marriage penalty.
I wonder when it really will be a significant enough benefit to just get divorced and live together..
Wonder no more, it is happening right here on bogleheads.org: viewtopic.php?f=2&t=236500
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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by Bigbonds » Tue Jan 02, 2018 9:04 pm

The only true actionable thing anybody can do is move from a state with high state and property taxes to another state. I’m with others who feel this is a feature and not a bug of the new law.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by bhsince87 » Tue Jan 02, 2018 9:38 pm

I think that moves like not indexing are an attempt to make longer-term changes in policy without introducing a sudden shock to the financial environment.

It gives people, governments, businesses, etc., time to plan and adjust accordingly as inflation gradually shifts the balance.
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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by kenyan » Tue Jan 02, 2018 10:51 pm

In political finance, indexing to inflation is another 'cost.' Avoiding that indexing is a cost savings measure. The same rationale applies for shifting tax bracket and other inflation indexing to chained CPI; it's not about what's fairer or more accurate (as there are plenty of other things still indexed to other measures of CPI), but it saves the government money. That's what it comes down to.

It is curious that there was a concerted effort to reduce marriage tax penalties, yet the $10k SALT marriage penalty was added.

Nevertheless, I agree that there will be more shifting to the Standard Deduction over time. We'll be doing it before too long as our mortgage gets paid down. Might try to periodically bunch charitable donations via DAF to itemize, but the SALT limits will hit us hard and further encourage us to prepay the mortgage.
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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by Bacchus01 » Tue Jan 02, 2018 11:42 pm

DrGoogle2017 wrote:
Mon Jan 01, 2018 12:26 am
I think it’s by design.

It was politically motivated. It hits democratic states hardest yet Dems could not fight it as wealthier people generally use itemization. This was a no win for them.


Essentially it significantly simplified the tax code by elimination itemization for another large chunk of people as well as essentially elimating AMT for those same people. Taxes, in general, just got a lot simpler. I don’t k is whether that is better or worse.

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Re: SALT Tax Deduction Max of $10K is NOT indexed to Inflation

Post by Alex Frakt » Wed Jan 03, 2018 2:36 am

Locked.

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