One of the most controversial provisions of the 2017 Tax Cuts and Jobs Act (TCJA) was the cap on state and local tax (SALT) deductions. The TCJA capped the SALT deduction at $10,000 – which sounds generous until you realize how high state and local taxes can be in certain areas.
SALT taxes are combinations of property (real estate) taxes and income taxes or sales taxes as dictated by individual state laws. In areas with high real estate values, property taxes alone can surpass $10,000.
A recent LendingTree study analyzed the average real estate taxes in the top fifty metropolitan areas, giving insight into areas that are more likely to be affected by the SALT cap. New York City tops the list, with the highest average property taxes of $10,202. Even the average real estate tax bill surpasses the SALT cap in the Big Apple.
San Jose and San Francisco have the next highest property tax bills at $9,626 and $8,493 respectively, and they have the two highest average paid mortgage interest values at $15,044 and $14,496 respectively – reflecting the Bay Area's incredibly high home prices.
Down the coast, Los Angeles also makes the list of the ten highest average real estate taxes at $6,635. Texas claims three of the highest property tax cities in Austin ($7,818), Houston ($7,384), and Dallas ($7,045). Boston ($7,198), Chicago ($7,307), and Hartford, CT ($6,663) round out the top ten.
Birmingham, AL has the lowest average real estate tax at $2,035 – almost five times lower than New York City. Louisville, KY has the second lowest tax at $2,733, followed by Salt Lake City ($2,765), Indianapolis ($2,773), and Phoenix ($2,835).
The shift away from itemizing and toward standard deductions may be reflected in the low percentage of tax returns that include real estate taxes. Only three cities had real estate taxes in more than 38% of their returns – Hartford, Washington, D.C., and Baltimore. The lowest percentages of returns with real estate taxes were in Tampa, FL and Orlando, FL, both below 18%.
Mortgage insurance premiums (MIPs) could provide useful deductions in cities with high property values – if MIPs are restored for the 2019 tax year and not included within the SALT cap. The recently introduced Mortgage Insurance Tax Deduction Act of 2019 would make the mortgage insurance deduction permanent if it becomes law.
Who could benefit the most from MIP deductions? LendingTree's data shows eight markets other than San Jose and San Francisco that have average mortgage insurance premiums over $2,000, with four of them also located in California. They are San Diego ($2,758), Los Angeles ($2,458), Washington, D.C. ($2,180), Riverside, CA ($2,162), Denver ($2,084), New York ($2,076), Sacramento ($2,061), and Seattle ($2,012).
The lowest average paid mortgage insurance value by far was Buffalo's $972. Cleveland was the next lowest value at$1,063. Other cities with low average MIPs include Milwaukee ($1,109), Pittsburgh ($1,119), and Cincinnati ($1,134).
The TCJA's primary goal was to simplify taxes by giving taxpayers more incentive to take the standard deduction. You may fall into that category – but if you're affected by the SALT tax cap, don't assume that you can't itemize. Even though some deductions were eliminated, there's a long list of other deductions that may apply.
The SALT deduction cap is unlikely to change anytime soon. You have ways to address the cap, such as moving or downsizing, but you still have to factor it into your tax strategy.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.