How the Federal Tax Overhaul Could Affect You
The complexity of the tax code – before, and still – mean that the new tax policy approved by Congress Wednesday will have infinite repercussions, based on everything from your income and number of children you have to your medical expenses and status as a divorcee, or as an heir to a wealthy estate. Some of the consequences (intended and otherwise) will take years to surface.
But one change is expected to hit individuals in states like Illinois particularly hard: A $10,000 limit on the amount of state and local taxes (sometimes referred to as SALT) that can be deducted from your federal taxes. It’s as if the federal government didn’t tax your state and local taxes.
Previously, that deduction was uncapped.
“In the past it has been basically recognized that state and local taxes, taxing on those taxes, was double taxation,” Civic Federation President Laurence Msall said. “Now it’s basically being said only $10,000 is the maximum that you can deduct.”
Given Illinois’ multitude of units of local government, reliance on property taxes and this summer’s increase in the state income tax rate, Msall predicts many residents will bypass that limit.
“If you think of an average family of two, where the main income earners each earn $50,000 a year: The state income tax is now just about 5 percent – 4.95 percent – that’s $5,000 in income tax that will be pushing up against the limit,” Msall says. “If they pay property tax in excess of $5,000, they won’t able to get the full … deductibility.”
That’s before taking sales taxes into the equation.
Gov. Bruce Rauner, who says he likes that the plan is “pro-business” but wishes it does more for the middle class, says all of that is reason for Democrats to get on board with his own agenda to grow the state’s economy.
“For states like Illinois and others, it’s, it makes it more difficult. It makes it all the more important that we make the type of changes that we’ve been, I’ve been, recommending from day one. That we bring down our property taxes. That we bring down the income tax hike.”
Rauner, a Republican, hasn’t explained how Illinois would manage without the income tax revenue.
Illinois residents can take a larger deduction this year, if they hurry – as many are.
According to the Cook County Treasurer’s Office, 1,775 households prepaid $14,442,041 last year; so far this year, 11,897 have paid $84,015,199.
“So if the United States government says next year you can only deduct $10,000, that leaves this year … It’s not 2018 yet, we still have until Dec. 31. Anybody can come in and take the full deduction this year. So you can’t deduct $60,000 next year, but you can deduct $60,000 this year. And that’s the advantage,” Cook County Treasurer Maria Pappas says. “So it’s like the last minute deal.”
The deduction limit only matters if you itemize your taxes.
The federal plan doubles the standard deduction – a big selling point for Republicans, who say that increase will help a lot of households.
Follow Amanda Vinicky on Twitter: @AmandaVinicky
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