Cap on SALT deductions: Long Islanders saw less of a tax savings, while some paid more

ALBANY — Many Long Island taxpayers didn't see as much of a savings from the 2017 federal tax overhaul as those in most other states, and some have ended up paying more to the government, according to a Newsday analysis.

That's largely because the Tax Cuts and Jobs Act, which took effect in the 2018 tax year, capped state and local tax deductions, known as SALT, at $10,000, hitting those with high incomes and high property values particularly hard.

But the tax act also helped many who weren't strongly impacted by the cap on SALT by reducing tax rates, boosting the child tax credit aimed at cutting taxes for families, and doubling the "standard deduction," which changed the way the majority of taxpayers filed their taxes and thus reduced the number of people itemizing.

"Overall, the TCJA [Tax Cuts and Jobs Act] as a whole was probably favorable to sort of moderate- and lower-income taxpayers because the standard deduction was bigger," said Brian Schultz, a tax partner at Plante Moran, one of the largest accounting firms in the nation. The act also simplified the tax code and was a benefit for most business owners and the ultra-wealthy who had investments, he said.

But while the tax act may have put dollars back in some taxpayers' pockets, the upper middle class "probably didn’t get as much benefit, especially if they were in a state that had a high state income tax because of the SALT cap," Schultz said, adding that the cap was "detrimental to a lot of upper middle class taxpayers" in those states.   

The cap has drawn the ire of politicians in high-tax, high-income, blue states such as New York, where residents, especially homeowners, often relied on the SALT deduction to reduce their federal taxes. Some politicians from New York, which relies heavily on millionaires for tax revenue, also feared higher taxes would drive high earners to move to states with lower taxes.

With the SALT cap and other portions of the tax act set to expire at the end of 2025, it has become a major campaign issue heading into November for the presidential and congressional candidates. The fate of the tax act will be decided by the winners of November's election.

Newsday analyzed federal tax data from 2016, 2019 and 2021. Those years represent, respectively, the year before the law was passed to avoid any changes in taxpayer habits made in anticipation of the law, the year after it took effect, and the most recent tax year available. The analysis largely focused on 2019 because a historic high in capital gains in 2021 — because of, for example, home sales and retirements after the COVID-19 pandemic — reflected one-time increases in income data, inflating the effective tax rate.

Overall, the effects of the law varied based on income levels, whether households had children to take advantage of the tax credit, and whether the taxpayers owned a home, experts said.

One way to determine who saved and who lost as a result of the tax act is to examine the effective tax rate, meaning the percentage of a taxpayer's income spent on taxes. 

The analysis found almost every state benefited more from the tax act than New York. In fact, New York ranked No. 49, ahead of only California, when measuring how much the state's effective tax rate declined after the tax overhaul. New York's average effective tax rate dropped 0.54 percentage points, from 17.31% in 2016 to 16.78% in 2019.

Nationally, the average effective federal tax rate dropped 0.99 percentage points from 2016 to 2019, according to the data.

While a few tenths of a percentage point seems small, it can equate to hundreds or even thousands of dollars depending on a person’s income.

On Long Island — which has some of the highest property taxes in the nation — the average effective tax rate dropped by 0.74 percentage points from 2016 to 2019. And the average dropped for 128 of 154 Long Island ZIP codes for which data is available for all three tax years.

Data for some ZIP codes on Long Island was withheld by the Internal Revenue Service to protect taxpayer identities, so it wasn't available for analysis. And some communities encompass more than one ZIP code. 

But in 26 ZIP codes, largely in Suffolk County, the average effective tax rate increased anywhere from 0.03 percentage points to 7.11 percentage points — with the highest in East Marion, Brightwaters and Westhampton Beach, according to the data.

Further analysis, however, showed some Long Islanders also paid more.

In Cold Spring Harbor ZIP code 11724, taxpayers saw their average effective tax rate decrease by 0.23 percentage points from 2016 to 2019, but those earning between $75,000 and $100,000 in the same ZIP code saw an increase of .81 percentage points.

This suggests higher concentrations of households with few or no kids, very high home values and faster-rising incomes between 2016 and 2019, said E.J. McMahon, adjunct fellow at the Manhattan Institute for Policy Research.

And while the data shows averages, it doesn’t provide individual stories.

For example, Ken Elan, 71, and his wife, "empty nesters" from Port Washington who together earn between $100,000 and $300,000, pay about $24,000 a year in property taxes. Elan, who still itemizes largely because of his law practice, said he used to deduct his property taxes and about 9% of his state income taxes on his federal return, but now it’s capped at $10,000.

"Now I have to swallow 9% of the taxes I pay to New York State," he told Newsday. "I’m paying the taxes, in other words, twice. This really hurts."

Here’s what to know about how the 2017 tax law impacted Long Islanders:

A higher standard deduction

The Tax Cuts and Jobs Act, passed in 2017, nearly doubled the standard deduction from $6,500 to $12,000 for individual filers and $13,000 to $24,000 for joint filers from 2017 to 2018. This means married couples, for example, can deduct $24,000 automatically without having to itemize their spending. The amounts were tied to inflation, providing a benefit as costs rise year over year.

The tax act also made tax brackets larger and reduced income tax rates, meaning more people’s taxable income was subject to lower rates.

"The increase in the standard deduction produced pretty significant savings for people, especially what would be lower middle income by Long Island standards, in combination with the reduced tax table rates," McMahon said. He cautioned against generalizing for everyone, however, because the tax act affected different people in different ways.

There is a mix of income ranges on Long Island, but because of the high cost of living, salaries tend to be higher in some cases, and it’s common for both spouses to work, meaning household incomes can be higher than in other parts of the state, experts said.

Those with higher incomes may not have seen as much of the tax savings, if at all.

For example, nearly 450,000 households, about 30% of filers on Long Island in 2019, earned between $75,000 and $200,000 and saw a decrease in their average effective tax rate of 0.43 percentage points from 2016 to 2019, meaning the percentage of their income spent on taxes was slightly less.

Those earning between $25,000 and $75,000, nearly 500,000 households, about 32% of filers in 2019, saw a decrease in their average effective tax rate of 1.04 percentage points — a larger savings.

Simpler filing

Along with the standard deduction, the tax act also capped itemized deductions, including charitable contributions, state and local income and property taxes, and lowered the cap on mortgage interest taxpayers are allowed to deduct from $1 million down to $750,000.

As a result of the deduction changes, fewer people itemized, meaning most taxpayers no longer subtract certain expenses from their taxable income.

In Nassau and Suffolk counties, the number of itemized returns drastically dropped, by more than 60% from 2016 to 2021, according to the most recent tax data.

"It’s now easier to file your taxes," McMahon said. "For the majority of taxpaying households, pulling together the information to support itemizing was most of the work involved in getting your taxes together."

But while many benefited from the standard deduction, those with higher incomes and property taxes may not have saved as much as they would have through itemizing and deductions prior to the tax act, experts said.

Because the standard deduction is tied to inflation, it continues to increase, meaning that for many, if not most, the standard deduction over time will increasingly provide a higher savings than itemizing would, McMahon said. "More people will find it worthwhile each year to take the standard deduction," he said.

SALT cap

One of the most controversial changes of the tax act was the cap on state and local tax deductions, which was divisive largely along party lines.

Most Republicans in Congress voted in favor of the bill, saying it would simplify and lower taxes for families and businesses. Most Democrats — including all of New York's Democratic representatives — voted against it, saying it was a giveaway for the ultra-wealthy and corporations largely because of corporate tax cuts, and harmful for middle-class families, particularly in the suburbs. 

Thirteen Republicans, most from high-tax states, opposed the measure, largely because of the SALT cap, including New York Reps. Dan Donovan, John Faso, Peter King, Elise Stefanik and Lee Zeldin.

Some of those who opposed the measure were in competitive races in 2018 and being targeted by Democrats. And there was concern the cap would hurt homeowners in high-tax suburbs like Long Island — which are often battleground districts during elections.

Elected leaders in New York, including then-Democratic Gov. Andrew M. Cuomo, also were concerned that the cap would hurt the ultra-wealthy, driving them out of the state and reducing state revenue.

But Congress passed the legislation and it was signed into law by then-President Donald Trump, a Republican.

The $10,000 cap is one of the reasons why New York and California had the lowest drops in the average effective tax rate in the nation from 2016 to 2019. It had a larger effect on taxpayers in the middle and upper middle class as well as the highest earners.

For example, those earning between $100,000 and $200,000 in New York — about 13% of the approximately 9.59 million households that filed in 2016, or about 14% of the approximately 9.76 million households that filed in 2019 — saw a 0.93 percentage point decrease from 2016 to 2019, the second-smallest for their bracket nationally behind only Maryland.

California and New York were the only states where those earning $1 million or more saw an increased average effective tax rate.

Newsday’s analysis largely focused on the 2016 and 2019 tax years because the most recent year available, 2021, was a historic year for capital gains, with people selling homes and cashing out 401(k)s following the pandemic. The one-off leap in income for some taxpayers may have skewed the income data for high earners, but the 2021 data does show that with higher incomes come higher taxes, and the ability to deduct less because of the cap.

In 2021, the average effective tax rate on Long Island was 1.11 percentage points more than in 2016, which means taxpayers saw less savings than in 2019 when capital gains weren’t as high.

And, those earning between $75,000 and $200,000 — about 30% of Long Island taxpayers who filed in 2021 — had an increase in their average effective tax rate of about 0.41 percentage points, according to the data. That increase was likely due to a combination of higher average incomes because of capital gains and the SALT cap.

With the historic increase in capital gains, 142 of the 154 Long Island ZIP codes available for all three tax years saw an increased average effective tax rate from 2016 to 2021, largely because they made more money.

"In a lot of instances, they lost potentially hundreds or thousands of dollars in deductions," John Pellitteri, an accountant and partner at Grassi, an accounting and financial advisory firm based in Jericho, said of high earners with high state and local taxes.

For example, a couple making $160,000 each, paying a minimum of $10,000 each in income taxes, with $15,000 in property taxes, would have been able to deduct about $35,000 in state and local taxes, said Judith Francis, an accountant and president of Francis Tax and Accounting Service in Melville. With the cap, they can only deduct $10,000, so they lose about $25,000 they were once able to deduct, she said.

And unlike the standard deduction, the cap was not tied to inflation, and it’s punitive against married couples because it’s capped at $10,000 per household, said Kenneth Winkelman, an associate professor and chair of the Accounting, Taxation and Business Law Department at SUNY Old Westbury.

"It’s a mix, but at the end of the day, though, the two heavy hitters make it bad for us," Francis said of the SALT and mortgage deduction caps on Long Island.

Seaford homeowner Brent Hertz, 65, said his family is losing out on deducting an additional $2,500 each year because of the SALT cap. "I pay way more than what the cap is," he said.

Hertz, who now takes the standard deduction instead of itemizing, said he’s had to pay into the federal government the last two years, which he hadn't had to do before. "I’m not a fan of it," he said of the SALT cap.

Child tax credit

Prior to the 2017 tax law, taxpayers could reduce their taxable income through personal and dependent exemptions.

The law eliminated those exemptions and instead increased the child tax credit to $2,000 per child under the age of 17 and created a new $500 credit for other dependents such as full-time college students. The child tax credit, however, decreases by 5% for incomes over $200,000 for single parents and $400,000 for married parents.

"People who still have kids got the biggest tax break from the new tax law," McMahon said, adding that the credit may have offset the loss of SALT for many taxpayers, but it didn’t help empty nesters and those earning over the income threshold who don’t qualify for the full credit.

"The lower you were on the income level, the more the savings came in," Pellitteri said.

Families earning under $100,000 "got a little more bang for their buck," he said, and families with children earning under $200,000 probably saw up to $6,000 in savings.

But for some families, it may have been a wash because of the elimination of the personal and dependent exemptions, Winkelman said.

Child tax credit data was not readily available.

High earners

The tax act’s impact on the highest earners depends on several factors, including the size of their income and whether they own a business.

Statewide, those earning between $200,000 and $1 million saw a decrease in their average effective tax rate of 2.13 percentage points from 2016 to 2019, according to the data. County-level federal tax data stops at “$200,000 and above" to protect taxpayer identities.

State tax data shows that 24% of the nearly 536,000 households earning between $200,000 and $1 million statewide in 2019 lived on Long Island.

And of the more than 55,000 households earning $1 million or more, 18%, nearly 10,000, lived on Long Island, according to the state data.

Some business owners were able to benefit from federal business deductions as well as a state workaround that essentially allowed them to indirectly deduct the taxes they paid above the cap. The ultra-wealthy also might have been helped by reductions in corporate tax breaks, Schultz said.

And the federal rollback of what’s known as the alternative minimum tax, or AMT, provided a significant tax break for those earning between $200,000 and $800,000, experts said.

The alternative minimum tax system was put in place to ensure the mega-rich paid their taxes, but largely because of inflation, some six-figure earners in the lower end of the bracket also ended up having to pay.

The highest earners are still subject to AMT, and some of those in high-tax states like New York were hurt by the SALT cap.

Statewide, those earning $1 million or more saw an increase in their average effective tax rate of 1.1 percentage points from 2016 to 2019. A change of a tenth of a percent on an income of $1 million equates to $1,000.

As a result, some high earners have decided to leave New York, according to experts and accountants.

Pellitteri, who has more than 100 clients, said he’s seen about 10% to 15% of those in the higher brackets relocate to states with lower taxes.

The tax changes, along with the remote workforce, have "really empowered people to seek out tax-favorable and lifestyle-favorable locations," said David McKelvey, a tax partner for Marcum LLP in Melville.

That’s bad for states such as New York that are "extremely" dependent on millionaires for state tax revenue, McMahon said.

Economic impact

New York is a high-tax state, but it also has a large population and costs more to provide public services including education and law enforcement. 

"The more people that flee the state, the higher the burden is on those that remain," Winkelman said.

Because of the 2017 tax act, some New Yorkers who used to receive refunds may instead end up owing money, meaning less money being spent at local businesses, he said.

Ken Elan, the Port Washington resident, said many of his friends are retiring and keep asking when he’s headed to Florida or some other low-tax state. But that’s not an option for him and his wife, he said, adding: "We love it here. We love the people. It’s a great community."

But, Elan said, "I’ve lost a good deal of deductions, and it’s more money out of my pocket."

Fortunately it hasn’t meant cutting back on too much, but they might take a trip to Europe if they had extra money, he said. And it’s less money for his sons when he’s gone, Elan said, adding, "I want to make sure they’re provided for."

Overall, Pellitteri said he’s seen taxpayers across the board "buttoning up" as a result of the tax act and inflation.

"They’re taking one less vacation. They’re not splurging on all the new stuff that they were when the tax benefits were a little more," he said. And those in the lower brackets are generally using the tax benefits to pay off debt, Pellitteri said.

The SALT cap has been hard for families such as the Hertzes, whose children have grown up, so they can’t get the added benefit of the dependent credits.

"You tighten your belt year-round," Hertz said. Hertz is of retirement age, and when he starts collecting Social Security it should provide some relief, but he’ll never be able to fully stop working, he said.

"We’re overly taxed," Hertz said. "I love Long Island, I just wish it wasn’t so expensive."

With Arielle Martinez