INDONESIAKININEWS.COM - Are you paying hefty state income taxes or property taxes? Before the passage in 2017 of a major tax law—dubbed the...
However, the 2017 law capped state and local tax (SALT) deductions at $10,000 for the 2018 through 2025 tax years, making it less likely you’ll receive a full tax benefit for those payments at tax time.
Members of Congress are trying to uncap the SALT deduction, and more than 20 states have found a way around the issue for some taxpayers. Let’s take a closer look at the SALT deduction, how it impacts your federal income taxes and whether things might change in the near future.
What Is SALT?
For federal income tax purposes, state and local taxes include nonbusiness taxes that taxpayers can deduct using tax software or an old-fashioned paper tax form, “Schedule A, Itemized Deductions.”
Those taxes include:
1. State and Local Income Taxes or State and Local Sales Taxes
If you pay state or local income taxes at tax time, have state or local income taxes withheld from your paycheck, or make estimated tax payments to your state or local government, those taxes are deductible.
You may deduct sales taxes instead of state and local income taxes, but you can’t deduct both. To write off sales taxes, you can either track your actual sales taxes paid throughout the year, use the sales tax tables included with the IRS instructions for Schedule A, or use the IRS sales tax deduction calculator.
2. State and Local Real Estate Taxes
You can deduct the property taxes paid on any real estate you own that isn’t used for business purposes.
Keep in mind that not all charges on your property tax bill are deductible. You can’t deduct:
- Service fees, including those for water or trash collection
- Fines charged by the local government, such as those charged for mowing your lawn or shoveling your sidewalks when you don’t comply with local ordinances.
- Assessments for improvements that tend to increase the value of your property, like building a new sidewalk or installing street lights in the neighborhood.
3. State and Local Personal Property Taxes
Many state and local governments levy a tax when you register a car or boat. This tax is deductible as long as it’s based on the value of the property.
How the SALT Tax Deduction Has Changed
The various state and local taxes we’ve outlined are deductible on your federal tax return. However, a couple of changes from the 2017 tax law make it tough to get the full benefit of your deduction.
First, the law beefed up the standard deduction, so nearly 90% of taxpayers now claim it because they don’t have enough write-offs to make itemizing deductions worthwhile. But you must itemize in order to deduct state and local taxes on your federal income tax return.
Second, the 2017 law capped the SALT deduction at $10,000 ($5,000 if you’re married and file separately from your spouse). This means you can deduct no more than $10,000 in property taxes plus state income or sales taxes.
The Impact of the SALT Deduction Cap
Before the 2017 tax overhaul, taxpayers could deduct their total state and local taxes paid, limited only by their federal taxable income. The cap was designed, in part, to offset tax cuts included in the 2017 legislation, which President Donald Trump signed in December of that year.
A $10,000 cap might not make a big difference in states with low or no income taxes and low property tax rates. However, it stings individuals in high-tax states like New York, New Jersey, California and Connecticut.
For example, according to an analysis from The Pew Charitable Trusts, New York taxpayers claimed, on average, $22,169 in state and local taxes on their federal income tax returns prior to passage of the Trump tax law. The $10,000 cap means the average New York taxpayer loses out on more than $12,000 of SALT deductions each year.
Will SALT Deductions Be Uncapped?
As with many other elements of the 2017 tax law, the SALT cap is temporary: It applies only to tax returns filed for 2018 through 2025.
Several lawmakers have unsuccessfully proposed eliminating or raising the SALT deduction limit. Most recently, one such plan was stripped from the Inflation Reduction Act, the sweeping climate and economic package that President Joe Biden signed in mid-August.
In the meantime, 22 states—Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Oklahoma, Oregon, Rhode Island, South Carolina and Wisconsin—have enacted workarounds that allow some state and local taxes to be deducted beyond the SALT cap.
But the maneuvers only benefit owners of certain types of businesses, including limited liability companies (LLCs), partnerships and S-corps. Those are called “pass-through entities,” because the business income and tax liabilities pass through directly to the owners.
Individual taxpayers without a pass-through business and people in states without workaround legislation are stuck with the $10,000 cap unless Congress agrees to lift it before 2025.
Source: forbes
