For taxpayers living in states with high taxes, the state and local tax (SALT) deduction has traditionally provided valuable tax relief. However, changes brought by the Tax Cuts and Jobs Act (TCJA) of 2017 have placed a $10,000 cap on SALT deductions, significantly affecting many taxpayers. The new landscape requires careful planning to maximize potential savings, especially for those with high state and local tax obligations.

In this article, we’ll cover what the SALT deduction is, how the $10,000 cap affects you, strategies to manage SALT deductions, and potential changes to keep an eye on.

What Is the SALT Deduction?

The state and local tax (SALT) deduction allows taxpayers to deduct certain state and local taxes on their federal tax return. Prior to 2018, there was no cap on the SALT deduction, so taxpayers could deduct the full amount of state and local property taxes and either state income taxes or sales taxes paid.

The types of taxes that qualify under the SALT deduction include:

• State and Local Income Taxes: These are the taxes paid to your state or locality based on your income.
• Property Taxes: Taxes assessed on real property, such as your home.
• Sales Taxes: If you choose to deduct sales tax rather than income tax, you can include the sales taxes paid throughout the year.

For high-tax states such as New York, California, New Jersey, and Illinois, SALT deductions have traditionally provided significant tax relief for residents.

Understanding the $10,000 SALT Deduction Cap

The TCJA placed a cap of $10,000 ($5,000 for married couples filing separately) on the SALT deduction starting in the 2018 tax year. This limit applies to the total deduction for state and local income, property, and sales taxes combined.

For example:

• If you pay $8,000 in state income taxes and $6,000 in property taxes, your total state and local taxes are $14,000. Under the current law, however, you can only deduct $10,000, leaving $4,000 as a non-deductible expense.

The SALT cap has had a significant impact on taxpayers in high-tax states, especially homeowners who typically pay both substantial income and property taxes. This cap means that many people who previously itemized their deductions and relied on SALT for substantial tax relief no longer see the same benefits.

Who Is Most Affected by the SALT Cap?

The SALT deduction cap has had a greater impact on certain groups, such as:

• Homeowners in High-Tax States: Those with substantial property taxes, especially in states with high state income taxes, are limited in the amount they can deduct.
• High-Income Taxpayers: Individuals in higher tax brackets often pay higher state income taxes, which can quickly exceed the $10,000 cap when combined with property taxes.
• Dual-Income Households: Married couples with dual incomes may experience a higher combined state tax burden, bringing them to the cap more quickly.

If you’re in one of these groups, understanding the SALT cap’s impact on your finances is essential for effective tax planning.

Strategies for Managing SALT Deductions

While there’s no simple way to circumvent the $10,000 SALT cap, there are some strategies you can consider to manage your tax burden more effectively.

1. Consider Timing of Tax Payments:
• If you’re close to the cap, you might be able to time your tax payments to maximize your deductions. For instance, if you pay property taxes semi-annually, consider paying in December rather than January to claim a deduction for the current tax year.
• This strategy requires careful consideration, especially if you’re already at the cap for the current year, as pre-paying taxes may not result in a larger deduction.
2. Explore Other Deductions or Credits:
• With the SALT deduction capped, it’s important to explore other deductions and credits. For example, charitable contributions, retirement account contributions, and Health Savings Account (HSA) contributions can help lower your taxable income.
• These tax-saving tools allow you to make up for lost deductions without facing the $10,000 cap.
3. Review Standard vs. Itemized Deductions:
• If you’re not getting as much benefit from itemizing due to the SALT cap, the standard deduction might provide better tax savings. For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.
• Many taxpayers who previously itemized have found the standard deduction more favorable under the new law. Evaluate your itemized deductions each year to determine if the standard deduction offers greater savings.
4. Maximize Retirement Contributions:
• Contributing to retirement accounts such as a 401(k) or IRA reduces your taxable income. By reducing your AGI, you may also reduce your state income tax burden, indirectly helping to offset the SALT cap’s impact.
• Consider maximizing contributions to both employer-sponsored retirement accounts and personal IRAs to take full advantage of tax-deferred growth and lower income taxes.
5. Consider Moving:
• For those heavily impacted by the SALT cap, relocating to a lower-tax state might be a consideration, especially for retirees or individuals with flexible work arrangements. While moving is a major decision, it could significantly reduce your tax burden if you’re able to live in a state with low or no income tax.
• This strategy isn’t feasible for everyone, but it may be worth considering if you have the flexibility and expect to be impacted by the SALT cap in the long term.

Potential Future Changes to the SALT Deduction Cap

The SALT cap has been a point of debate in Congress, particularly among representatives from high-tax states who advocate for its repeal or adjustment. Although there have been proposals to modify or eliminate the SALT cap, as of now, it remains in place.

Keeping an eye on policy changes is important, as a future tax reform bill could affect the SALT deduction. It’s worth consulting a tax professional each year to ensure you’re aware of any updates and to adjust your tax strategy accordingly.

Real-Life Examples of Managing the SALT Deduction Cap

Here are some examples of how different types of taxpayers might navigate the SALT cap:

• Example 1: Married Couple in a High-Tax State: A married couple in New Jersey pays $8,000 in state income tax and $7,000 in property tax. Their combined SALT deduction would be $15,000, but due to the cap, they can only deduct $10,000. They consider maximizing retirement contributions and charitable donations to reduce their taxable income in other ways.
• Example 2: Single Homeowner with Dual Residency: A single filer with homes in both California and Nevada spends part of the year in each state. Since Nevada has no state income tax, they decide to establish Nevada residency, paying only Nevada property taxes, thereby lowering their overall tax burden.
• Example 3: Retiree Considering Relocation: A retiree paying substantial property and income taxes in New York considers moving to Florida, which has no state income tax. After analyzing the potential tax savings, they decide to relocate, reducing their tax burden and avoiding the SALT cap entirely.

Conclusion: Planning Around the SALT Deduction Cap

The $10,000 SALT deduction cap has created challenges for many taxpayers, particularly those in high-tax states. However, by understanding the cap’s impact and employing strategies like timing tax payments, maximizing other deductions, and contributing to retirement accounts, you can offset some of the effects of the cap.

Tax laws are always evolving, so it’s important to stay informed and consider working with a tax professional who can guide you through these changes. With proactive planning, you can navigate the SALT deduction cap and manage your state and local tax burden more effectively.