Does the State and Local Tax (SALT) Deduction Limit Matter in NYC?

[showtime]

The State and Local Tax, or SALT, deduction is now limited to $10,000 on your federal tax return, which news outlets are uniformly saying will hurt residents of high tax blue states like New York and California.

However, what these news outlets don't point out is that the threshold for hitting the Alternative Minimum Tax (AMT) has been dramatically increased, from $120,700 for single filers and $160,900 for married filers to $500,000 for single filers and $1,000,000 for married filers.

Remember that hitting the AMT means you basically can't deduct SALT in the first place, so for all practical purposes a lot of higher income New Yorkers will now be able to deduct at least $10,000 vs nothing at all previously due to AMT.

So who does this SALT deduction limit actually hurt? It must be hurting some people as there's news of a budget deficit in Albany due to people fleeing for states like Florida.

As it turns out, the people who are most hurt are the very wealthy who have a lot of assets, and real estate in particular, but very low income. Ironically, this basically means real estate investors and developers who can take advantage of lots of depreciation on their real estate assets. This depreciation can literally cause these real estate investors and developers to have a negative income tax liability in some years, as evidenced by Donald Trump.

Because they have all of these investment properties generating paper depreciation losses, they have a very low or negative income tax liability, meaning they don't get hit by the AMT. And because they are wealthy, they can afford large personal residences with high taxes. Remember that the SALT deduction limitation, when it comes to property taxes, only applies for personal residences. Investment properties as usual are unaffected, as real estate investors always get the best tax breaks.

So think about it, previously you were a big real estate investor living the good life in New York, paying zero income tax because you have little or negative income due to all that depreciation. Plus, you were able to deduct all those property taxes you pay on your $50 million penthouse condo from your federal tax return. Now, you can't deduct those high property taxes on your fancy personal property anymore (at least not anything over $10,000 all in, including your other state and local taxes)!

[Benny]

To summarize, the State and Local Tax (SALT) Deduction limit doesn't affect most working New Yorkers, who have to work for a living and earn wage or other active income. Let's be honest, most working professionals in the city who can afford to also buy an apartment will be making more than the old AMT limits, so they didn't get to deduct any SALT in the first place. Now, they will be able to deduct at least $10,000.

For anyone in NYC making less than the old AMT limits, I doubt this SALT deduction limit matters as they probably were paying less than the cap in the first place.

So the only people this limit hurts are those who can afford large, expensive personal residences (and thus are wealthy) but don't have much income. Previously, they would have been able to deduct all of their personal property taxes, and now they are capped.

Would love to hear thoughts from the community on any other possible scenarios.