Deductions for State and Local Tax (SALT) After Tax Reform
The purpose of any deduction is to lower the amount of income on which you'll have to pay taxes. If you live in a state that imposes a sales tax, income tax, property or real estate tax, the IRS will allow you to deduct those amounts on your federal income tax return to lower your tax bill. Before the tax laws changed, there was no limit to how much taxpayers could deduct for state and local taxes (SALT). Beginning in tax year 2018, the deduction has been capped at $10,000 for all state and local income, property, and sales taxes combined.
The SALT deduction does not include taxes paid on foreign property. The Tax Cuts and Jobs Act eliminated the Foreign Real Estate tax deduction altogether.
Note: Clients who use their home or part of their home for work can still take a business deduction for their property, even if it means they exceed the $10,000 limit.
Who is most affected by the SALT deduction cap
This tax law change does not directly affect everyone. The new SALT restriction specifically affects those clients who itemize their deductions on their tax return.
The new limit will have the most significant impact on taxpayers living in states with high income and property tax like California, New York, New Jersey, Illinois, Texas, and Pennsylvania. New home buyers, too, will be affected. The new tax plan put restrictions on many of the major deductions given to homeowners.
The $10,000 cap applies to most filing statuses. Married couples, consequently, will feel the impact more than singles. For instance, your client who files as single can deduct up to the full $10,000 amount, but for clients who are married filing jointly, the maximum allowed is still $10,000 per return. Even if a client and spouse file separately, they can only deduct up to $5,000 each, for a total of $10,000.
What will the tax law changes mean for my refund?
If a client takes the standard deduction already, the new SALT limit alone should not impact their refund. Overall, many of your clients could see their income taxes go down and refunds go up due to other changes, such as the new tax bracket structure, the revised Child Tax Credit, and the increased standard deduction.