How does the $ 10,000 restrict on state and native tax deductions work?

State and local governments generally impose some type of tax on their citizens in the form of property taxes, sales taxes, or state income taxes. Traditionally, those who paid these taxes were entitled to deduct the amount of their payment from their federal income. State and local tax deduction is abbreviated as the SALT deduction and is available to anyone listed on their federal tax returns.

In 2017, however, the Tax Reduction and Employment Act was passed and the Federal Tax Act was reformed. One of the biggest changes was a SALT deduction restriction that went into effect in 2018. That change resulted in the listing no longer making sense to many – and millions of Americans losing a significant portion of their prints.

This is how it works.

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Your SALT withdrawal is now limited

The Tax Cut and Jobs Act limits the SALT deduction to $ 10,000. Regardless of how much state and local taxes you actually pay, you can only deduct a maximum of $ 10,000 from your federal taxable income. The taxes covered by the SALT deduction include:

  • State income or sales taxes (you can deduct either income taxes or sales taxes, but not both in the same year)
  • Property taxes
  • Personal property taxes

This $ 10,000 cap applies to all taxpayers regardless of their filing status, with the exception of separate filing of marriages. Separate filers have a SALT cap of $ 5,000.

So this could affect you. Say you have $ 125,000 gross adjusted income and $ 25,000 other deductions that you can list, and your total land tax and state income tax bill is $ 24,000. Under the old rules, you can make a SALT deduction of $ 24,000. Your IRS reported taxable income would drop to $ 76,000.

Under the new rules, while you still have to pay the $ 24,000 state and local taxes, you won't be able to deduct your entire payment amount. You could only claim $ 10,000 and would lose $ 14,000 worth of prints. Instead of dropping your income from $ 125,000 to $ 76,000, it will instead drop it from $ 125,000 to $ 90,000 – assuming you are still on your tax return (more on this below).

Unfortunately, if you're still listing, it's hard to make a head-to-head comparison of how much it would cost you to lose your SALT deductions, as the Tax Cut and Jobs Act has changed tax brackets too. However, a 2019 inspector general report found that the $ 10,000 cap in the 2017 tax year, before other changes to the tax law, would have reduced the amount of the SALT deduction for 10.9 million taxpayers who would have collectively seen the value of their deductions decrease by 323 Billion dollars.

Should you still list? The SALT cap could change the math

Assessing the impact of the SALT restriction is challenging as the Tax Cuts and Jobs Act has also made a major change. It more than doubled the standard deduction. As a result, you may find that while it once made sense to break down your taxes, it is no longer the case. And if you stop listing, the SALT cap will not affect you.

In 2021, the standard deduction is $ 12,550 for individuals and married couples filing separately, $ 18,800 for heads of household, and $ 25,100 for married joint applicants. In other words, it's more than the SALT deduction could be worth with the new limit.

If the $ 10,000 that you can still deduct for state and local taxes are combined with your other deductions so that the total is over $ 12,550, $ 18,800, or $ 25,100, then you should still list your taxes. In that case, if your state and local taxes are more than $ 10,000, you will lose the deductions that you could have claimed had the SALT limit not been put in place. However, unless you have many other deductions, the $ 10,000 you are allowed to claim now is below the standard deduction so listing it doesn't make sense anymore.

The SALT cap has been the law for years and will remain in effect until 2025, when the restriction ends, unless tax laws change beforehand. As long as it is in effect, millions of Americans will be taxed at the federal level on money that they used to pay other taxes locally.