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How the New Federal Tax Deduction Limits Impact Where People Live

The first tax season after the passage of the Tax Cuts and Jobs Act has come and gone, and many homeowners have felt an unexpected pinch. In high-tax states, some have been particularly hard hit this year thanks to changes in the tax laws.

There are new federal deductions limits on SALT, or state and local taxes, which are now capped at $10,000 per year. People who once used these deductions to help offset high income and property taxes in some states may soon rethink where they live.

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Taxpayers Hit by the New SALT Deduction Limit

It's a common misconception that these new tax law changes only impact high-income and wealthy Americans. In truth, part of it depends on where you live. The Treasury Department estimates that as many as 11 million Americans in high-tax states like New York, New Jersey, and California will forfeit $323 billion in deductions because of the new $10,000 cap on SALT deductions.

The Tax Foundation reports that Americans who earned over $100,000 per year accounted for about 80 percent of the people that derived the full benefit of the SALT deduction. But, this can be a relative figure when geography is thrown into the mix. For example, a family that earns $50,000 in South Florida will need to earn over $100,000 in New York to enjoy the same standard of living.

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Are Americans Re-Thinking Where They Live?

Economics play a major role in the livelihood of American families. As the cost of living goes up, it makes sense that people will start to look around for more a comfortable place to call home. Likewise, the more economically inviting an area becomes, the more likely it will be to attract new residents. This is playing out across America, and the new tax law changes have become part of these discussions.

When you consider which states are gaining residents and which are losing, this becomes more clear. According to the U.S. Census Bureau's latest annual population estimates, Texas and Florida led the nation in overall population gains, with net gains of 379,000 and 322,000 residents respectively.

The biggest net losers last year were New York and Illinois, with losses of 48,510 and 45,116 residents respectively. What is clear about both the winners and losers is that people are flocking to states with lower taxation rates and fleeing the ones with high tax rates.

The annual Rich States, Poor States report, released by the ALEC-Laffer State Economic Competitiveness Index, ranks the economic outlook of U.S. states according to a list of 15 policy variables that include marginal tax rates, property tax burdens, estate taxes, and corporate income tax rates.

Interestingly, the lowest ranked states in the nation on this report are also the ones with the highest tax burdens. Among these are New York, Vermont, Illinois, California, and New Jersey. Among the top-ranked states are Utah, Idaho, Indiana, Arizona, and Florida.

According to the San Jose Mercury News, blue states fear a mass exodus thanks to the new tax reform act, but a senior officer at Moody's hasn't been able to come up with evidence of this yet. Granted, people just felt the full impact of the reform about a month ago.

In New York, the tax burden has become so high that state government is forced to audit 100 percent of the taxpayers that claim to have "relocated to Florida" while still owning a home in the state.

Past academic research does support a long-term relationship between taxes and state migration. Some experts believe that we'll see more evidence of this in the coming year.