Tax Update on State and Local Tax (“SALT”)
The IRS has passed final regulations aimed at preventing tax payers from “getting around” SALT deduction limits. A tax deduction will lower the amount of a person’s income that is subject to taxes in the first place. This is different from a tax credit, which reduces the overall tax bill owed to the Internal Revenue Service (“IRS”) for the tax year.
Prior to the Tax Cuts and Jobs Act (“TCJA”), the only limit on what a single taxpayer could deduct was for individuals with an adjusted gross income of over $150,000. Currently, all taxpayers, no matter the level of income, can only deduct up to $10,000 of total SALT taxes (including property taxes). SALT deductions can only be claimed if a taxpayer itemizes their deductions, rather than taking the standard deduction. The TCJA nearly doubled the standard deduction rate, which caused even less people to itemize and seek SALT deductions. The previous standard deduction amounts being: $6,350 (Single/Married Filing separately); $12,700 (Married Filing Jointly); and $9,350 (Head of Household). The new standard deduction amounts are as follows: $12,000 (Single/Married Filing separately); $24,000 (Married Filing Jointly); and $18,000 (Head of Household). This has made taking the standard deduction a much more attractive option to many taxpayers.
The SALT deduction cap of $10,000 is likely to negatively affect taxpayers that live in high property tax areas, own expensive homes, or multiple properties (such as a residential home and vacation home); however, the charitable donation threshold has increased from 50% to 60%. So, higher-income earning taxpayers are still seeing benefits in the new tax law.