SALT – State and Local Tax Deduction

State and Local Tax (SALT) Deduction: What You Need to Know

Some states have a higher cost of living than other states where the standard cost of living is not so high. This means that expenses such as cars, housing, and food may have higher taxes than in other states. If you live in a state with higher taxes, you may be eligible to deduct taxes from your tax returns that are paid to local and state governments.

What is the State and Local Tax (SALT) Deduction and What Can it Be Used For?

The State and Local Tax (SALT) deduction is an “itemized” deduction that allows taxpayers to deduct the amount of taxes they pay from their local or state government. You can only claim the SALT deduction only if you itemize your deductions. However, you cannot take the standard deduction.

What is an “Itemized” Deduction and What Are Some Examples?

Under U.S. law, “itemized” deductions are eligible expenses that taxpayers can claim on a tax return. This deduction allows individuals to decrease these expenses from their taxable income.

Examples of itemized deductions are:

• Charitable contributions
• Mortgage interest
• Medical expenses
• State, property, and local income taxes
• Investment interest expenses

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When Was the SALT Deduction Enacted and What is Its Purpose?

The SALT Deduction was enacted in 2017 as part of Donald Trump’s tax reforms. Although there was no limit in previous years, the Tax Cuts and Job Act (TCJA) capped the deduction at $10,000 every year for property taxes and either state taxes or sales taxes.

For example, let’s say a single filer itemized their deductions and claimed their deduction of $14,000 on their federal income tax return. A total of 11,000 is listed for their state and local taxes, and $5,000 is listed for their state and local income taxes. In this scenario, the taxpayer’s SALT deduction would only be $10,000.

Furthermore, taxpayers are eligible to deduct personal property taxes. Examples of personal property are vehicles, a boat, furniture, and business property. This applies to single filers, joint filers, and the heads of households. For married couples that file separately, the deduction is capped at $5,000. It is stated that the SALT deduction offsets taxpayers’ liabilities that exclude income taken in taxes for local and state government services. This deduction is beneficial for higher-income taxpayers. Before the TJCA, over 90 percent of taxpayers benefited from and claimed the SALT deduction if their income was above $100,000.

How Does the SALT Deduction Impact the U.S. Government?

According to the tax code, SALT is a large tax expenditure that provides deductions, credits, or exclusions that would not be included in a normal tax code. As of 2020, the Joint Committee of Taxation (TJC) estimated that the total deduction for state and local taxes would cost the government about $24 billion. Trump and members of the Republican party enacted this cause to offset lost revenue from tax cuts. Moreover, if Congress does not secure individual tax provisions, the SALT deduction cap of $10,000 will expire in 2025.

Who Can Benefit From the SALT Deduction?

As previously stated, those with higher income levels can benefit from this deduction. It is stated that about 10-15% of filers who claim their tax returns choose the credit versus their standard tax deductions. Taxpayers should consider tax planning to minimize their overall tax liability

What States Benefit From the SALT Deduction?

In 2018, the tax foundation listed New Jersey, Connecticut, California, New York, and Maryland as beneficial for the SALT Deduction. These five states are considered “blue states,” which means they vote “Democratic.” North Dakota, South Dakota, and Wyoming are three red, or “Republican” states that honor this deduction.

Many states are offering pass-through businesses with a workaround for the $10,000 SALT deduction. More than twelve states have passed legislation for workarounds including California, New York, Wisconsin, Connecticut, Maryland, and others. However, the legislation is pending in states such as Illinois, Oregon, Massachusetts, Michigan, Pennsylvania, and North Carolina.

In California, the Senate passed a bill to give pass-throughs (partnerships, LLCs, and S corporations) an option to pay entity-level taxes. For example, those who are members of these businesses can exclude the amount the entity pays from the gross income.

New York Governor Andrew Cuomo proposed to allow pass-through businesses to pay entity-level taxes.

In Connecticut, the pass-through is mandatory for the SALT workaround.

Why Do Most People Claim the State and Local Tax Deductions? How Does it Vary From State to State?

Individuals who itemize can deduct property taxes but can choose between deducting from their income or sales taxes. Many individuals choose to deduct their income taxes because they may exceed sales tax payments.

Individuals who live in California, Maryland, New York, or other higher-income states, may opt to deduct their state and local taxes.

Individuals who live in states like Texas or Louisiana, with higher sales taxes and lower income taxes, may opt to deduct their sales taxes.

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How Can I Claim the SALT Deduction?

Claiming the state and local tax deduction can seem pretty hefty and tedious. Here’s a step-by-step process on how the state and local tax deduction can be included in your next tax return.

1. You have to itemize your deductions. It is important to know for sure if this deduction is right for you. Remember that this deduction is only limited to $10,000. If SALT is your main tax deduction, you don’t need to itemize because your standard deduction would be higher.
2. Decide whether to deduct the state or sales income taxes. You may live in a state that has high state taxes or high-sales income taxes. Depending on your state, you would choose the larger amount of the two. You may ask, “what if I spent the same amount in both income and sales taxes?” In that case, you can choose the one that has more evidence to qualify for the deduction. If you don’t have enough evidence of the deduction you desire to choose, consider deducting the income taxes.
3. Use Line 5 of Schedule A to calculate your deduction.

Line 5 is of Schedule A is divided into 5 sections:

• Line 5a – You write the amount you paid in either your local income taxes or sales taxes.
• Line 5b – This section is for the amount you paid in either real estate taxes or local property taxes.
• Line 5c – This section asks for the amount you in personal property taxes. For example, you will list state and local taxes you paid on personal property such as a car, boat, or other personal belongings.
• Line 5d – You will sum up the amount of money from lines 5a, 5b, and 5c.
• Line 5e – This section calculates the value of your SALT Deduction. If Line 5d is equal to, or less than $10,000, that is the amount of your deduction. If the amount exceeds $10,000, your deduction will still be capped at $10,000.

Note: If you paid any other taxes, you can include them on Line 6. Then, sum up the amount of Line 5e and Line 6 and place the amount on Line 7. You can also add all of your itemized deductions on the bottom part of Schedule A. The total will go on Line 9 of Form 1040.

Who Benefits From the SALT Deduction?

The SALT Deduction greatly benefits high-income taxpayers that reside in states with higher tax rates. If your income is a lot higher, you are more than likely going to care about your tax deductions. If you have a high income, you shouldn’t have to rule out the SALT Deduction, even if your state has low-income tax rates.

Is the SALT Deduction Necessary for Taxpayers? What Effects Does it Have on Them?

Since 1913, the U.S. has established its federal income taxes. The National Governors Association defends the SALT Deduction and implies that state and local taxes, sales, and real estate taxes are mandatory.

As previously stated, SALT is one of the largest tax expenditures. At the same time, the deduction can cost the government trillions of dollars in missed revenue. Taking away the deduction may double the amount taxpayers have to pay. Individuals with incomes of over 100,000 would have an increase in dollars as well as their percentage of income.

While taking away the deduction would raise taxes, Congress plans to reduce the deduction limit, which could affect many taxpayers. Filers who have incomes of $500,000+ would see a decrease in their federal income tax rates, an increase in estate tax rates, and a decrease in capital gains.

Individuals with lower incomes may be affected as well, but it will have a lesser impact. Changing the SALT Deduction can cause a change in revenue in local and state governments. Since most taxpayers are paying more in federal tax rates, the government can choose to reduce their local tax rates.

Moreover, you don’t have to be a wealthy individual to be affected by the SALT deduction cap. Middle-class individuals who itemize may also face higher tax rates.

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