State and local tax deductions (SALT) are an important consideration for many taxpayers. These deductions allow individuals to reduce their federal taxable income by deducting the amount they pay in state and local taxes. Here are 15 key points to help you understand SALT deductions.
1. Eligibility: Taxpayers who itemize their deductions can claim SALT deductions on their federal tax returns. Those who opt for the standard deduction cannot benefit from this deduction.
2. Types of taxes: The SALT deduction includes state and local income taxes, real estate taxes, personal property taxes, and sales taxes paid during the tax year.
3. Limits on deductions: Starting in 2018, there is a $10,000 cap on the total amount of state and local taxes that can be deducted for both single filers and married couples filing jointly.
4. State income tax deduction: If your state imposes an income tax, you can deduct those payments from your federal taxable income using Form 1040 Schedule A.
5. Local income or sales tax deduction: If your state doesn’t impose an income tax but has a sales or local income tax instead, you have the option to choose between deducting these or claiming a general sales tax deduction.
6. General sales tax deduction: Taxpayers residing in states without an individual income tax can choose to deduct either their state/local general sales taxes paid during the year OR use IRS tables that estimate these expenses based on average consumption patterns.
7. Property tax deduction: Homeowners can deduct real estate property taxes paid on primary residences as well as vacation homes or rental properties if they itemize their deductions.
8. Vehicle registration fees: Some states include vehicle registration fees as part of personal property taxation which may be deductible under SALT provisions if itemized.
9. Effect of AMT (Alternative Minimum Tax): The Alternative Minimum Tax limits certain itemized deductions including SALT ones; this means that some high-income taxpayers may not be able to fully benefit from these deductions.
10. State and local tax overpayment: If you received a refund on your state or local taxes in the previous year, it may be considered taxable income in the current year if you claimed SALT deductions for those taxes last year.
11. Workaround strategies: Some high-tax states have implemented strategies to help residents mitigate the impact of the SALT deduction cap, such as charitable funds set up by state governments where taxpayers can donate and receive a credit against their state tax liability.
12. Married couples filing separately: If you are married but choose to file separate returns, both spouses must claim either the standard deduction or itemized deductions; you cannot mix and match.
13. SALT deductions for business owners: For small business owners who report their business income on their personal tax returns (sole proprietors, partnerships), they can deduct state and local taxes paid on business income as part of their Schedule C expenses.
14. Tax planning considerations: When deciding whether to claim itemized deductions including SALT, consider your total allowable itemized deductions versus the standard deduction amount based on your filing status; choose whichever provides the greater benefit.
15. Consult a professional: Given the complexity of tax laws and individual circumstances, it’s always wise to consult with a qualified tax professional who can guide you through understanding how SALT deductions apply specifically to your situation.
Understanding State and Local Tax (SALT) deductions is crucial when planning your annual taxes. By taking full advantage of these deductions within legal limits, individuals can reduce their overall federal taxable income and potentially save money come tax time.