Second Stimulus: Democrats Fight To Lower Taxes On Homeowners

One of the most annoying parts of the Trump Tax Plan (TCJA 2017) was the $10,000 cap on State and Local Tax (SALT) Deductions when filing your federal tax returns. Many think the tax increase was put in place to punish voters in the blue states that didn’t vote for Trump. Many of those blue states have higher real estate values, state income taxes, and often many residents with higher incomes. The negative effect on peoples’ take-home pay will only grow more substantial as both incomes and property values increase over time.

The SALT cap, which I’ve previously written about how the Trump tax plan screws Californians, has become a sticking point in the current Coronavirus relief bill. Republicans in Congress are fighting to keep this onerous indirect tax, while the Democrats are fighting to reinstate the full state and local tax deduction that would benefit millions of American homeowners. Keep in mind, your income taxes may drop if you are out of work thanks in part to the coronavirus, but your property taxes are still due. 

The Washington Post just published this headline. “Acrimony spikes as Pelosi alleges White House, GOP don’t give ‘a damn’ about unemployed during relief talks.” Nancy Pelosi and the Democrats are fighting to continue the addition of $600, per week, in unemployment benefits that have been a lifeline for those out work. Mitch McConnell and the GOP have proposed a much smaller $200 per week, additional unemployment benefit.

Does Removing Salt Cap Help the Unemployed?

There are still more than 30 million Americans currently on unemployment, which includes the addition of 1.2 million Americans who filed for initial unemployment benefits last week. This marked the twentieth straight week that 1 million, or more, people have sought aid. Could you live on $600 or $700 per week? Even during this lockdown, with not many options to spend money, I’m confident this would be a challenge for most people reading this post.

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Does the SALT Deduction Cap Really Matter?

As a Los Angeles financial planner, I will tell you this is a huge deal. A large number of my clients are homeowners with good incomes. You don’t have to be rich to see this limit on tax deductions hit your pocketbook. The median home price in Los Angeles County is around $665,000, according to Zillow

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, which translates a property tax bill around $8,312. Assuming you have a job to pay that mortgage, it isn’t out of line to believe you are paying more taxes with the SALT cap in place. To be able to afford a house at that price, you would want to have an income of at least $130,000. The home affordability income number is partially dependent on the down payment level and interest rates of mortgage. An income at this level translates into something between $5,500 and $8,800 (depending on marital status) owed to the California Franchise Tax Board. You see how you can quickly get well above the $10,000 state and local tax cap.

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To be clear, the Democrats in Congress are just asking to eliminate the SALT tax cap for the years 2020 and 2021. While the GOP implies this is just another gift to the rich, it will hit many middle-class workers and homeowners across the country. Many of them are struggling to continue making their mortgage payments and pay their property and state taxes while suffering economically during the Coronavirus pandemic.

Before the Trump Tax Plan, which many called a giveaway to corporations and the rich, taxpayers were able to fully deduct the money they paid in state and local taxes (mostly property taxes) from their federal tax returns. Income taxes and property values are higher in many blue states like New York, New Jersey, and California, which tend to vote bluer.

Biden has also called for the State and Local Tax cap to be eliminated if he is elected President later this year.