5 minute read—Beginner|I Know Things|Expert CPA
The tax overhaul in 2017 resulted in a deduction cap for state and local property and income or sales tax (SALT). The cap was set at $10,000 per tax return (not per person). This was a drastic change from the previously unlimited deductions for individuals. The $10,000 cap expires at the end of 2025 but can be avoided if the right strategy is adopted. Read on to learn if it’s possible for you to avoid the SALT cap.
The SALT cap works like this: imagine a single filer who owes $6,000 in state income tax and $6,000 in property tax on their home. For the tax year 2017, before the SALT cap was established, this filer could deduct the $12,000 total of these taxes if they itemized their deductions. But for tax years 2018–2025, the deduction for state and local taxes is capped at $10,000 per return, and it isn’t indexed for inflation.
As a result of the change in 2017, many filers have switched to taking the standard deduction rather than itemizing write-offs on Schedule A.
The SALT cap greatly affects high-tax states like New York, California, Connecticut, and so on, and has little effect in low-tax states like Alaska, New Mexico, Washington, etc. As a result, wealthy residents of high-taxed areas are moving to low-taxed areas like Texas and Florida for its lack of state income tax and lower cost of living.
In some states, lawmakers have developed strategic options to maintain state and local tax deductions. A common strategy to avoid the SALT cap is useful to owners of pass-through businesses who have the ability to set up self-rentals of business-use space and help reduce SALT while increasing a business owner’s deductions to reduce their own taxable income. It should be noted that this helps only with businesses in states with state income taxes. This workaround to the SALT cap allows pass-through business owners to deduct taxes through their business versus attempting to itemize as a SchA deduction.
Work in a state with state income tax and want to know if you can legally avoid the SALT cap? Contact Insogna CPA for more information on what your business can do to save on taxes.