Sales Tax
Coping With the SALT Tax Deduction Cap
Among numerous other changes for individuals—including an increase in the standard deduction, suspension of dependency exemptions and modifications of other deductions—the TCJA clamps down on the write-off for SALT payments.
May. 09, 2022
Are you paying an arm and a leg in state and local tax (SALT) payments? Prior to the Tax Cuts and Jobs Act (TCJA), you could deduct the full amount with no restrictions. But the TCJA imposes a $10,000 cap on deductions for SALT payments for 2018 through 2025.
As a result, you must stay on your toes to ensure that you can claim the maximum deduction for your situation.
Background: Among numerous other changes for individuals—including an increase in the standard deduction, suspension of dependency exemptions and modifications of other deductions—the TCJA clamps down on the write-off for SALT payments. Generally, the TCJA provisions for individuals are temporary in nature, spanning 2018 through 2025.
The main question in 2022 is whether or not you’ll be itemizing deductions. Millions of taxpayers have switched from itemizing to claiming the standard deduction. If it still makes sense for you to itemize, be aware that the SALT deduction encompasses the following components.
- State and local property taxes: Typically, this includes taxes on the principal residence where you reside and any property taxes for a second home, such as a vacation home, or land where you hope to eventually build a getaway.
- State and local income taxes: These are income taxes you must pay to the applicable state and local tax authorities.
- State and local sales taxes: Frequently, you must pay sales tax on goods and services you purchase in your state, with certain exceptions.
Note that the SALT deduction is available for only for a combination of state and local property taxes and either state and local income taxes or state and local sales taxes. In other words, you can’t count both income and sales taxes in the computation.
This is a no-brainer for working taxpayers in the nine states in the union—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming—– that don’t impose state income tax on wages. Obviously, they should take the sales tax deduction. Taxpayers in states with extremely high income taxes, like California and New York, are inclined to do the opposite. And those who a caught in the middle should compare the two and choose the one that’s bigger this year.
If you’re claiming a SALT deduction with a sales tax component, you may use one of these two methods.
- As long as you can substantiate the expenses, you may write off your actual costs. Comb your records at tax return time to find the annual total.
- Instead of deducting actual expenses, you may use a special IRS table that provides a flat amount based on the state of residence and family size. This will often produce a smaller deduction than the actual expense method, but it’s more convenient. Furthermore, you can add sales tax paid for certain big-ticket items—vehicles, boats and home improvement materials—to the table amount.
The overall strategy is to deduct as much as you can while the SALT cap remains in effect. Usually, moderate-to-high income taxpayers who itemize may qualify for a $10,000 deduction in 2022.