State and Local Taxes (SALT) can be deducted on your federal income tax return, subject to certain limitations. This deduction allows tax payers to reduce their taxable federal income by the amount of state and local taxes they've paid during the year. The SALT deduction includes property taxes, state and local income taxes, or sales taxes (but not both income and sales taxes—you must choose one), and certain other taxes. Here's an overview of how the SALT deduction works, including the limitations that apply:
Components of the SALT Deduction
- State and Local Income Taxes: This includes taxes withheld from your paycheck, estimated tax payments you made during the year, and any balance due payments to your state or local income tax authority.
- State and Local Sales Taxes: Taxpayers have the option to deduct state and local sales taxes instead of state and local income taxes. This can be beneficial for residents of states without an income tax or for those who made significant purchases subject to sales tax during the year.
- Property Taxes: Real estate property taxes paid on property owned by the taxpayer are deductible. This includes taxes on residential, commercial, and land properties.
Limitations on the SALT Deduction
- $10,000 Cap: As part of the Tax Cuts and Jobs Act (TCJA) enacted in December 2017, the SALT deduction is capped at $10,000 ($5,000 if married filing separately) for the combined total of state and local property taxes, and income or sales taxes. This cap has been a significant change for taxpayers in high-tax states, where state and local taxes can far exceed this limit.
How to Claim the SALT Deduction
- Itemizing Deductions: To benefit from the SALT deduction, taxpayers must itemize deductions on their federal tax return using Schedule A (Form 1040). Itemizing deductions is only beneficial when the total of all itemized deductions exceeds the standard deduction for your filing status.
- Standard Deduction vs. Itemizing: For many taxpayers, the increased standard deduction under the TCJA means that itemizing deductions (including taking the SALT deduction) may not be the most beneficial option. It's important to calculate both methods to determine which results in lower taxable income.
Considerations
- AMT Considerations: Taxpayers subject to the Alternative Minimum Tax (AMT) may find that the SALT deduction does not provide a benefit, as SALT deductions are disallowed for AMT purposes.
- State Responses: Some states have explored or implemented workarounds to the SALT deduction cap, such as offering tax credits in exchange for charitable contributions to state-run funds. The effectiveness and IRS acceptance of these strategies can vary.
Conclusion
The SALT deduction offers a way to potentially reduce federal tax liability by deducting the state and local taxes paid. However, the$10,000 cap introduced by the TCJA limits its benefit, particularly for taxpayers in high-tax states. Whether to itemize deductions and take advantage of the SALT deduction is a decision that should be based on a comparison with the standard deduction and considered in the context of an individual's overall tax situation. Consulting with a tax professional can provide personalized advice and strategies for maximizing tax benefits under current laws.
