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Everything You Need to Know About The State & Local Tax (SALT) Deduction

Everything You Need to Know About The State & Local Tax (SALT) Deduction

In the past, the State and Local Tax (SALT) deduction was perhaps the most popular tax deduction in America.

You probably remember your parents or grandparents keeping all their receipts, even small purchases, like a box of nails or single heirloom tomato, and stuffing them in a brown paper folder. You can deduct an unlimited amount of sales tax, as well as state income and estate taxes, from your federal tax bill.

These days, because the TCJA puts a limit on the amount you can deduct, the SALT deduction no longer seasons up your tax return like it once did. But that doesn't mean it can't help you reduce your tax bill. Let's find out if the state and local tax deduction will benefit you and, if so, how to claim it.


What is SALT (State and Local Tax Deduction)?

First, remember that a tax deduction is virtually any expense that can be used to reduce your taxable income. Specifically, the state and local tax deduction allows you to deduct up to $10,000 of your state and local taxes as well as your state income or sales taxes.

Wait, state income or sales taxes? Yes. Unfortunately, you can't deduct state income and sales tax (Uncle Sam sees this as an attempt to put both hands in the cookie jar). You can combine property tax and sales tax or property and income tax, but not all three. Deciding which of the combinations works best for your tax return is part of the fun of taking this tax deduction.


How does SALT work?

Before you get too thrilled about the SALT deduction, remember that the TCJA Act puts a hard cap on it. Remember that the highest amount you can deduct is $10,000 or $5,000 if you are married and filing separately. 

That's not much, especially for taxpayers living in states with high real estate or property taxes. For example, suppose you paid $7,000 in property taxes and $9,000 in state taxes for the current fiscal year. In that case, you can't deduct $16,000 in federal income tax. You must choose the right combination of the two to keep your SALT deduction below $10,000 (for example, $7,000 in property taxes and $3,000 in state taxes).


How can you claim the SALT Deduction?

Alright, now the fun part. Fortunately, claiming the federal SALT tax deduction is not very complicated. Here are the steps to claim one.


1. Itemize your deductions.

At this point, you need to make sure that you are not taking the standard deduction. Note, you can only deduct $10,000, so if SALT is your only tax deduction, don't worry about deciding to itemize (the standard deduction would be higher in this case).


2. Choose to deduct either sales tax or state income tax.

Without mincing words – please pick the larger of the two.

For instance, if you live in a state with high-income taxes, such as California, New Jersey, or New York, you will likely deduct state and local income taxes. Alternatively, if you live in a state with high sales tax but little or no income tax, such as Louisiana, Tennessee, or Texas, you'll probably deduct sales tax if you itemize.

What if you spent the same amount on sales and state taxes? Well, if so, pick the one you can back up with the most evidence. You may have spent $5,000 in sales tax, but if you don't have any supporting receipts (or don't have time to look around for it), consider deducting the income tax.


3. Use Schedule A to declare the SALT deduction.

Finally, take a look at your Schedule A and report your figures (you will find the SALT on line 5 of Schedule A).


Who uses SALT Deductions?

You'll hear many people say that the SALT deduction benefits taxpayers living in high-income, property-tax states (think New Jersey, New York, and California), which is partly true. But more than that, the SALT deduction benefits high-income taxpayers living in states with high tax rates.

The higher your income, the more you worry about tax deductions, no matter where you live, because, you guessed right, you are taxed at a higher rate. So if you make a lot of money, don't rule out the SALT deduction, even if your state has low-income taxes.


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