The SALT (state and local tax) deduction lets eligible taxpayers deduct some state and local taxes from their federal taxable income. This deduction can save a lot of money, especially for those in high-tax areas. It's important to know about the SALT deduction to make the most of it. We'll cover what taxes you can deduct, the limits, and ways to work around them in this article.
The SALT (State and Local Tax) deduction is a big tax break. It lets some taxpayers deduct certain state and local taxes from their federal taxable income. This deduction helps offset the burden of double taxation. Taxpayers in high-tax states find it very helpful, as it can lead to big tax savings.
The SALT deduction is a tax break for those who itemize their deductions instead of taking the standard deduction. It allows them to deduct certain state and local taxes they've already paid from their federal taxable income. This includes property taxes, state and local income taxes, or state and local sales taxes, but not both.
The main goal of the SALT deduction is to prevent double taxation on the same income. It lets taxpayers deduct state and local taxes they've already paid from their federal taxable income. This deduction helps counteract some federal taxpayer liability by excluding income already taxed for state and local government services. It's especially helpful for those in high-tax states, offering significant relief from taxes at both levels.
Before the SALT deduction cap, most taxpayers claiming the deduction had incomes over $100,000. High-income individuals from states like New York, Pennsylvania, New Jersey, California, Texas, and Illinois benefited the most. The SALT deduction was the fifth largest tax expenditure, costing the U.S. Treasury about $100 billion annually before the cap in 2017.
Taxpayers can deduct state and local taxes through the SALT (State and Local Tax) deduction. This includes property taxes, state and local income taxes, and sales taxes. The limit for deducting these taxes is a total of $10,000 ($5,000 if married filing separately) for individuals.
Deductible personal property taxes cover taxes on things like boats or cars. Real property taxes are for general public welfare and are the same for all properties in a jurisdiction.
Some taxes and fees, like federal income taxes and homeowners association fees, can't be deducted. Taxpayers can choose to deduct either state and local income taxes or sales taxes, but not both.
Knowing what taxes and fees you can deduct is key to getting the most from the SALT deduction. Employees can deduct mandatory contributions to state funds for things like disability or unemployment insurance.
In summary, the SALT deduction includes property taxes, state and local income taxes, and sales taxes. But, it doesn't cover federal income taxes or homeowners association fees.
The Tax Cuts and Jobs Act (TCJA) in 2017 set a $10,000 limit on the state and local tax (SALT) deduction. Before this, there was no limit. This cap has caused controversy, especially in high-tax states, making some taxpayers pay more in federal taxes.
Many taxpayers feel the impact of the SALT deduction cap. In 2017, about 30 percent of taxpayers claimed the SALT deduction. This dropped to 11 percent in 2018 after the cap was put in place. The average SALT deduction benefit fell by 80 percent after the cap.
Higher-income taxpayers have been hit hard by the SALT cap. In 2017, 71 percent of the SALT deduction's benefits, worth $58 billion, went to those making over $200,000. Even with the cap, in 2023, 64 percent of the SALT deduction benefits still went to those with higher incomes.
Despite debate, the SALT cap was found constitutional by the Supreme Court. It is set to end in 2025 unless Congress extends or makes it permanent.
The SALT cap's effects differ by region. In 2020, the Washington, D.C.-Baltimore Area had the highest SALT deduction rate at 20.8 percent. The Brownsville, Texas area had the lowest at 1.6 percent. The SALT deduction cost the federal government $69 billion in 2017 but dropped to $21 billion in 2023.
If the SALT cap ends in 2025, spending on the deduction could jump from $23 billion in 2025 to $139 billion in 2026. The SALT deduction also helps increase state and local government revenues.
After the SALT deduction cap, some states have created special tax options. These allow business owners to go over the $10,000 SALT deduction limit. By using these options, business owners can deduct more state and local taxes, saving them money. Each state has its own way of doing this, helping taxpayers deal with the SALT deduction cap.
The future of the SALT deduction is still up in the air. There are efforts to bring it back, extend it, or make it permanent. Making changes to the SALT deduction could bring in a lot of money, from $2 trillion over 10 years to $564 billion. These changes could also affect the economy, with some options possibly slowing down growth.
Taxpayers need to keep up with the latest on salt deduction workarounds and the future of the SALT deduction. Knowing about these changes can help people and businesses make smart tax choices. This way, they can meet their financial goals.