salt deductions

How to Mine 2017 Returns for SALT Deductions

Jan 17th 2018
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Despite an eleventh-hour reprieve from Congress, this may be the last year many taxpayers deduct their state and local tax (SALT) payments on their personal tax returns.

The concession agreed to by lawmakers in the final version of the new Tax Cuts and Jobs Act (TCJA) comes “too little, too late,” for some clients, especially those residing in high-tax states.

Prior to the TCJA, individuals could generally deduct state and local property tax payments and either their state and local income taxes or sales taxes. There was no annual limit on the deduction. Now the new tax law allows a combined SALT deduction of $10,000 a year, beginning in 2018. In addition, due to other changes — including doubling the standard deduction and reducing or eliminating other itemized deductions — many taxpayers who have itemized in the past expect to claim the standard deduction in 2018,

Notably, the limited deduction doesn’t provide much help to residents of states like California, New York and New Jersey, where SALT payments can frequently exceed the 2018 standard deduction of $12,000 for single filers and $24,000 for joint filers. If they no longer itemize deductions, these taxpayers will realize ZERO federal income tax benefit from any and all of their SALT payments.

But that’s a story for next year’s tax season. It’s still full steam ahead for SALT deductions on the 2017 returns your clients are about to file.

Property taxes: For starters, the rules for deducting property taxes are relatively straightforward. Generally, you can deduct the full amount you’ve paid during the year. As a result of the new law changes, however, there was a mad dash in some states to prepay property taxes at the end of the last year. The IRS has already said that prepayments of property taxes made in 2017 are deductible only if the taxes were assessed prior to 2018 (IR-2017-210, 12/27/17).

Income taxes or sales taxes: In addition, you can write off your state and local income tax payments, or, alternately, your state and local sales tax payments. But it’s one or the other — you can’t have it both ways on 2017 returns.

Typically, you’ll still come out ahead if you deduct income taxes, especially if you’re a resident of a high tax state. The deductible amount includes amounts withheld from your paychecks and quarterly estimated tax payments. For upper-income taxpayers, the figure often reaches into five figures.

However, in some cases, the deduction for sales taxes will be preferable if you purchased several high-cost items in 2017. Furthermore, if you live in a state with relatively low income tax rates or one of the seven states with no income tax — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — you’re likely to fare better by deducting state and local sales taxes. There are two basic ways to do it:

  1. Deduct the actual amount of sales tax you paid during the year. This requires you to keep tabs on your expenditures that can be backed up by receipts and other documentation if the IRS ever challenges the deduction.
  2. Take the “easy way” out and rely on a special IRS table used for this purpose. The table lists flat amounts on a state-by-state basis and reflects your annual income and the size of your family.

The table amount is usually lower than the actual sales taxes you’ve paid for the year, but it’s less of a hassle. Furthermore, you can tack on the tax for several “big-ticket items” like cars, boats and home improvements.

[Note: The new law specifically bars a 2017 deduction for prepayments of state and local income taxes due in 2018. Clients who tried this approach at the end of last year won’t be able to add to their tax deduction.]

For the majority of taxpayers, deducting income taxes is the tax-smart approach, but there’s no substitute for crunching the numbers. Provide the assistance your clients may need to secure the maximum deduction on their 2017 returns.   

This article is part of a series titled Vintage 2017 Tax Deductions, which focuses on the key deductions your clients may be able to claim under the new tax law.