Will Congress Kill Your State and Local Tax Deductions?

Republicans currently working on tax reform legislation behind closed doors are debating the fate of deductions for state and local taxes.

As of this week, House Republicans plan to eliminate the state tax deduction but retain the deduction for property taxes, according to an Associated Press report.

That would mean folks in states that collect income taxes — which is most states — could no longer deduct their state income taxes from their federal income tax bill. But homeowners could continue deducting their local property taxes.

Rep. Kevin Brady (R-Texas), chairman of the House Ways and Means Committee, explained in a statement:

“At the urging of lawmakers, we are restoring an itemized property-tax deduction to help taxpayers with local tax burdens.”

So, that local tax deduction joins a few other well-known tax deductions that would reportedly remain in place, including those for mortgage interest and charitable donations.

Earlier reports suggested that Republicans are considering sharply curtailing the 401(k) tax deduction that millions of Americans use when saving for retirement. For now, the fate of the 401(k) deduction remains uncertain.

Tax reform details expected Wednesday

Of course, all of this could change as the tax reform debate continues.

And even if the property tax deduction is retained, it might make less sense for millions of homeowners to take the deduction if lawmakers make good on plans to increase the standard deduction.

Under the tax reform “framework” released by Republicans in late September, the standard deduction would rise to $24,000 for a married couple and $12,000 for a single person. That would make itemizing deductions less attractive for millions of taxpayers, and you must itemize if you want to deduct property taxes on your return.

However, that current tax reform framework is effectively no more than an outline of what Republican lawmakers wanted for tax reform at the time the framework was written.

Americans won’t know for sure whether any given deduction will be abandoned or retained until Republicans introduce their tax reform legislation, Congress approves it and President Trump signs it into law. And that assumes Republicans get that far. As the AP noted, Republicans failed to complete this process with health care reform.

The AP reports that Republicans will unveil a draft of their tax reform legislation on Wednesday.

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