State and Local Taxes (SALT)

For most taxpayers that qualify to take itemized deductions, SALT is a major contributor.  It helps boost qualified expenses above the standard deduction floor (see our earlier post discussing standard deductions).  Included in this category are; state property taxes, local property taxes, state and local real estate taxes and, state and local income or sales taxes (whichever is higher).  Under the new tax bill, the deduction for SALT is capped at $10,000. SALT has undoubtedly been one of the most contested areas of change in the new 2018 tax bill

Roughly 30% of taxpayers qualify and opt to itemize their deductions.  These taxpayers are generally composed of homeowners, residents of states with high-income tax rates, and filers with higher incomes.  California, Illinois, New Jersey, New York, Pennsylvania, and Texas account for more than half of the nationwide SALT deductions.

In general, taxes account for about 40% of total itemized deductions.  For a married couple with a total itemized deduction in 2017 of less than $24,000 (the new standard deduction amount), the option to itemize would no longer be advantageous in 2018.  If taxes make up 40% of itemized deductions, taxes paid would need to exceed $9,600 to make it worthwhile to itemize. But the maximum SALT deduction is limited to $10,000. This is only looking at the SALT component of Itemized deductions and assuming all other components remain deductible to the same extent they were in 2017.

States are looking for ways to reclassify revenue generated through state taxes.  A reclassification would move state income taxes to another category of itemized deductions and ease the effect of losing the ability to deduct state income taxes on the federal returns of their residents.  There are some states considering legislation that will reclassify certain state taxes to charitable contributions, another category of itemized deductions. While other states are looking to replace the state income tax with a payroll tax.  The payroll tax would reduce the gross income on which the federal income tax liability is calculated.

There are situations available in the tax code that allow you to deduct SALT.  If you have rental property, state, local, and foreign property taxes, and sales taxes are fully deductible on Schedules C, E, and F.  In future issues we will identify situations that may be available to utilize deductions that may have been altered and/or loss.

This section highlights the fact that though the new tax bill has been passed and is being implemented, changes are still possible.

Next week we’ll look at the interest deduction.