Did you know that anyone can deduct their state and local taxes from their federal tax return? This deduction is called the state and local tax deduction, or the SALT deduction, and it can be a very valuable deduction. While the SALT deduction was recently capped due to changes in tax law caused by the passing of the Tax Cuts and Jobs Act, it is still a valuable deduction and something those who itemize their tax deductions should take advantage of.
In this post, our experts here at Tax Defense Partners talk about what the SALT deduction is, talk a bit about the recent changes to the SALT tax deduction caused by the Tax Cuts and Jobs Act, and tell you how you can claim the SALT deduction today.
What is the SALT Deduction? Definition and History of the SALT Deduction
The SALT deduction is a deduction that allows taxpayers to deduct their state and local taxes from their federal tax return. State and local taxes have actually been deductible since federal income taxes were first instated in the US in 1913, though the rules about what qualifies toward the deduction have changed over the years.
For the first 50 or so years of federal income taxes in the US, taxpayers could deduct all state and local taxes that were not directly tied to a benefit. The first change to this rule came in 1964, when SALT deductions became limited to state and local property taxes, state and local income taxes, general state and local sales taxes, and state or local motor fuels taxes.
The next change came in 1978, when the ability to deduct state or local motor fuels got the axe. Then, in 1986 the ability to deduct state and local sales tax was removed from the tax code. This removal was reversed in 2004, and instead taxpayers got the option to deduct either income taxes or sales taxes.
SALT deduction rules remained largely the same after the 2004 change, until the passing of the Tax Cuts and Jobs Act in 2016, when a major change was put in place.
The Tax Cuts and Jobs Act and the SALT Deduction
The Tax Cuts and Jobs Act changed many things about United States tax law, including how taxpayers can utilize the SALT deduction. The Tax Cuts and Jobs Act put a cap on total SALT deductions, making the maximum amount of the deduction $10,000.
The cap on the SALT deduction was likely designed to offset other tax cuts, as the SALT deduction stops the US government from receiving billions of tax dollars each year. In 2017, the last year before the cap on the deduction went into effect, American taxpayers claimed $100.9 billion in SALT deductions. In 2018, it’s estimated that this amount dropped to around $43 billion due to the new deduction cap.
There has been some controversy over the SALT deduction cap because some say, in essence, it causes double taxation. Those against the cap argue that money that has been paid in state and local taxes should not count toward a person’s disposable income and should be fully deductible from an individual’s taxable income. Because of this argument, some lawmakers have proposed removing the cap. However, no legislation has yet been passed to remove the cap, which is set to remain in place until 2025 under the guidelines in the Tax Cuts and Jobs Act.
How Do You Claim SALT Deductions?
Though there’s now a cap on SALT deductions, taxpayers can still claim up to $10,000 in SALT deductions per calendar year. For the one third of all Americans who usually itemize their tax deductions, this is still a valuable deduction to remember at tax time.
So how does the SALT deduction work? How do you claim this deduction? The SALT deduction can only be claimed if you itemize your deductions. An individual can either take the standard deduction amount or the total amount of their itemized deductions, whichever is greater. To claim the SALT deduction, your itemized deduction amount must be greater than the standard deduction amount that applies to you. Then, you must include your SALT deduction amount on your itemized list of deductions.
Per SALT deduction rules, you can choose to deduct either your income taxes (which can include state and local income taxes) or state and local sales taxes you’ve paid over the tax year. Generally, you would want to choose the greater amount, which is, for most people, income taxes. However, those who live in states with no state income tax (such as Florida, Alaska, and Nevada) would likely want to claim state and local sales taxes.
Alongside either your state and local income tax or sales tax amount, you can deduct any real estate property taxes, personal property taxes, and state related mandatory contributions you have paid in the relevant tax year.
Many Americans will not be affected by the $10,000 cap on SALT deductions, as most who have historically claimed more than $10,000 in the SALT deduction had a minimum adjusted gross income of $100,000 or higher. However, if you’re among those who have paid more than $10,000 in SALT deduction eligible taxes in any given tax year, you will have to cap your deduction amount at $10,000.