In the past, taxpayers could deduct state and local tax (SALT) payments without any specific dollar limits. This often resulted in a tax return windfall for residents of states where income or property taxes or both are relatively high. But the landscape has changed on 2018 returns.
Under the Tax Cuts and Jobs Act (TCJA), the annual SALT deduction is limited to $10,000 for 2018 through 2025, barring any further acts of Congress. This includes any combination of (1) state and local property taxes and (2) state and local income taxes or sales taxes. At the same time, the TCJA effectively doubles the standard deduction, among other changes, to $12,000 for single filers and $24,000 for joint filers.
Here’s the net result: Many taxpayers who previously deducted SALT payments as part of their itemized deductions will opt for the standard one this go-round.
For those itemizers left standing, it is more important than ever to maximize the tax benefits of their SALT payments. The deduction is claimed on Lines 5-7 of the new Schedule A. Let’s take a closer look at the key rules.
First, you can deduct property taxes imposed by your state or municipality. Typically, this includes taxes on the main home where you reside and perhaps property taxes for a vacation house or raw land where you hope to eventually build a getaway. Second, you may deduct either the state and local income taxes or the sales taxes you paid during the year. Again, the total deduction is subject to the new $10,000 limit.
This decision is a no-brainer for taxpayers in the nine states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming—– that do not impose state income taxes on wages. Obviously, they can rely on the sales tax deduction instead. For taxpayers in high-tax states like California, New Jersey and New York, the choice to deduct income taxes rather than sales taxes is also usually clear-cut. But residents of states with a “middle ground” should compare the two deduction amounts.
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Notably, when you figure out the amount of sales tax you may deduct, you can rely on one of two methods:
- If you have the necessary proof of your purchases, such as receipts and credit card statements, you can write off your actual expenses. Taxpayers should comb through their records to find the annual total.
- Alternatively, you may use the IRS table for a flat amount, based on your state of residence and the size of your family. Typically, this will produce a smaller deduction than the actual expense method, but it’s more convenient. Plus, you can add the sales tax paid for certain “big-ticket items”—including the cost of vehicles, boats and home improvement materials—to the listed amount.
Bottom line: The SALT deduction for itemizers isn’t cut and-dried. Make sure your clients understand the new limits and the decisions they face.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.