Question

What is the SALT Deduction?

Answer

The federal tax reform law passed on Dec. 22, 2017 established a new limit on the amount of state and local taxes (SALT) that can be deducted on a federal income tax return. Beginning in 2018, the itemized deduction for state and local taxes paid will be capped at $10,000 per return for single filers, head of household filers, and married taxpayers filing jointly. The cap is $5,000 for married taxpayers filing separately.

Some states either have passed or are planning to pass new laws allowing taxpayers to make charitable contributions to government funds in exchange for state tax credits. If allowed, these creditable payments could enable taxpayers to effectively convert some of their lost SALT deductions to charitable deductions, which are generally fully deductible for those who itemize on the federal return.

State and Local Tax (SALT) Deduction Limit Goes into Effect in 2018

In prior years, taxpayers who itemized on their federal income tax return could deduct amounts paid for state and local income (or sales) and property taxes in full.

SALT Deduction New York

For example, New York plans to establish a new charitable fund that will support health care and education, among other programs, that benefit New York residents. Contributions taxpayers make to that fund will receive a state income tax credit equal to 85% of the contributions. For instance, if a taxpayer donates $12,000 to a designated fund, the entire $12,000 will be deductible on the federal return as a charitable contribution and the taxpayer will qualify for a $10,200 credit to offset state income tax liability. Assuming this taxpayer also owns a home in New York, property taxes will consume much of the $10,000 federal cap, so this SALT workaround will allow the taxpayer to deduct up to $10,000 of state and local taxes paid in addition to a $12,000 charitable contribution instead of being limited to a $10,000 deduction for the total state and local taxes paid.

New York also will allow employers to opt-in to a new payroll tax, which would reduce employee’s taxable income and provide a credit to offset the employee’s state income tax.

New York and New Jersey also authorized local governments to establish local charitable funds that would allow taxpayers to receive a property tax credit for donations to that fund.

SALT Deduction California

California is considering similar SALT Deduction legislation while Connecticut already enacted similar legislation earlier this year.

The IRS is expected to issue guidance later in 2018 on these SALT limit workarounds. Taxpayers who think they will pay more than $10,000 in state and local income and property taxes will want to stay tuned for updates regarding these SALT limit workarounds.

 

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