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SALT Deduction under U.S. Tax Law

Last Update Date : April 30, 2019
Estimated Read Time: 5 min

SALT Deduction is an itemised deduction. According to the federal tax reform law, a new limit has been established on State & Local taxes which can be deducted from a federal income tax return. As per the IRS, these new updates will be helpful to the taxpayers in understanding the relationship between federal charitable contribution and the new statutory limitation on the deduction of state and local taxes.

Old SALT Deduction

Taxpayers who were itemizing on federal income tax return were allowed to deduct amounts for state and local income along with the property taxes to the extent possible (fully). The taxpayer’s had the option of deducting personal state and local general sales taxes instead of state and local income taxes.

Benefits Before the Amendment

There were certain privileges prior to the update of SALT deductions to be followed from 2018-2025:

Taxpayers

  1. The SALT benefits were maximum to taxpayers whose incomes was more than $100,000.
  2. The taxpayer’s income increases the value of the SALT deduction as a percentage of adjusted gross income.

Benefits to the States

  1. The SALT deductions benefitted the states having a large number of high-income taxpayers and high tax environments.
  2. The states using SALT Deductions more were the east and northeast regions.
  3. The states in the west and Midwest also took the advantage of SALT deductions.
  4. The per tax unit average deduction in Connecticut, New York, and New Jersey were all over $7000 and approximately to $6000 in California.

New Reforms in SALT Deduction Limits

According to the IRS, these limits are applied for the taxable years from 2018-2025:

Individual$10000
Head of Household$10000
Married taxpayers filing jointly$10000
Married taxpayers filing separately$5000

There can be no deduction at all for the personal foreign real property taxes.

Eligibility

A person is eligible for choosing SALT Deductions if he falls in any of the following criteria:

  1. You can only claim for SALT Deduction if you itemize your deduction on Schedule A.
  2. You cannot use both Standard deductions as well as Itemized deduction.
  3. You cannot claim a SALT Deduction if you are dependent on another person.

Expenses Eligible for SALT Deduction

The following are the expenses that are liable to be deducted from state and local taxes:

  1. Withholding for state and local income taxes as shown on Form W-2 or Form 1099.
  2. The estimated tax payments that you made this year.
  3. The extended tax payments that you made this year.
  4. Your tax payments you made this year that arose previous year.
  5.  Your contributions to state benefit funds.

SALT Deductions Applicability

SALT Deductions apply to the following mentioned:

  1. State Income taxes
  2. Local Income taxes

Documents Required

These documents would give you a summary of your state and local tax you paid during the year.

  1. Form W-2 (Wage and Tax Statement): It mentions the State Income tax withholding in box 17. The local income tax in box 19 and the state benefit fund contributions either in box 19 or in box 14.
  2. Form W-2G (Certain Gambling Winnings): It shows state income tax withholding which is mentioned in box 15 and local income tax in box 17.
  3. Form 1099-G (Certain Government Payments): It shows state income tax withholding in box11.
  4. Form 1099-INT (Interest Income): It mentions the state income tax in box 13.
  5. Form 1099- DIV (Dividends and Distributions): It mentions the state income tax in box 14.
  6. Form 1099-R (Distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc.): It shows state income tax in box 12 as well as local income tax in box 15.
  7. Form 1099- MISC (Miscellaneous income): It mentions the state income tax in box 16.
  8. You require bank statements along with copies of cancelled cheques or debits (for estimated payments).
  9. Application of the estimated taxes that you have applied for the portion of the previous year’s state refund.

Special Privileges

There are certain privileges that are given to the spouse concerning SALT deductions. These privileges are:

  1. Married taxpayer’s filing jointly has the advantage of deducting all state and local income taxes that all of them paid during that year even though the tax payments are made separately or jointly by them.
  2. You as well as your spouse can only deduct the amount of your own state and local income tax that you paid during the tax year if both of you file separate returns (state, local and federal income tax returns).
  3. The taxpayers who will be filing state returns jointly but filing Federal returns separately have the privilege with respect to how they can deduct the state income taxes they paid during the year.
  4. Each spouse is eligible to deduct the amount of state and local taxes actually paid during the year only if they live in a state where they are declared liable for jointly and individually state and local tax payments.

Impact

Taxpayers

The updation in SALT Deduction can result in the following to the taxpayers:

  1. Though all the states of America use SALT Deductions there are certain states which used more advantages of SALT deductions like New York, Connecticut, New Jersey, California, Massachusetts, Illinois, Maryland, Rhode Island Vermont and the District of Columbia.
  2. These States got the benefits of using SALT Deductions as high-income filers live here and the taxpayer’s income increases the value of their SALT Deductions.
  3. But with the new updates, a limit has been made which will restrict the SALT deductions of these taxpayer’s up to the extent of $10,000

Homeowners

The changes in the SALT Deductions will adversely affect you if you are paying high property taxes due to the following reasons:

  1. If you live in high property- tax jurisdictions.
  2. If you have a large and heavy property tax bill due to owning of luxurious homes, or
  3. If you own a primary residence as well as one or more vacation homes due to which you have bigger property bills.
  4. If you fall into the above categories, you can only deduct $10000 of your personal state and local property taxes.
  5. The tax liability of the income class will reduce.
  6. The limits are same for single, as well as married filers, so the married couples will get less advantage with the new tax update on SALT deduction.

People Also Ask

Q. Is there any substitute for SALT Deductions?

A. No. But you can avoid SALT deductions by choosing Standard Deductions in case it turns out to be more beneficial in particular tax year.

Q. Is it allowable to prepay 2019 SALT deductions in 2018?

A. Yes, it is possible to pay estimated taxes beforehand.

Q. Can you deduct both state income tax and sales tax?

A. Yes, you can deduct either state income tax or sales tax but not both.

According to the new updates on limitations for 2018-2025 U.S tax reforms have been imposed in comparison to prior deduction where there was no limit on SALT Deductions. Now in recent years, there are possibilities that Standard deduction will gain more importance than the SALT deductions due to its amount being doubled which will not make itemizing worthwhile for choosing.

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Anshu Jain
Anshu Jain is the Manager, Offshore Operations at H&R Block (India). She holds an MBA in Finance and has an experience of over ten years in business operations, U.S. tax advisory and program management. When she is not working, Anshu enjoys reading and writing about U.S. taxation.

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