What Is the State and Local Tax (SALT) Deduction?
Under the new tax regulations, the state and local tax deduction is capped at $10,000. What does that mean for taxpayers?
Example Scenario
Assume you paid the following taxes in a given year:
- $6,000.00 in property tax
- $12,000.00 in state income tax
- $2,000.00 in sales tax on a car purchase
Prior to the tax reform, you would have been able to take a $20,000.00 deduction on your Schedule A of Form 1040 as an itemized deduction.
Property tax, state-level income tax, and sales tax (always state-based) are all considered state and local taxes.
This deduction could have saved you at least $6,000.00 on your federal income tax return.
Impact of the $10K Cap
Under the new rules, you are limited to only taking $10,000.00 as a deduction on your federal income tax return for state and local taxes.
In the scenario above:
- Your tax break is reduced to approximately $3,000.00
- The additional taxes paid no longer provide further federal tax savings
Key Implication
Moving forward:
The more you earn and/or the more you pay in property tax is meaningless as it pertains to the state and local tax deduction.
This cap affects taxpayers in high-tax states the most, especially those with significant property holdings or high incomes.
Frequently Asked Questions
What is the SALT deduction cap?
The SALT deduction is capped at $10,000 under current tax laws. This means taxpayers can only deduct up to $10,000 in total for state and local income, property, and sales taxes on their federal income tax return.
How does the SALT cap impact high-income earners?
High-income earners are more likely to exceed the $10,000 cap, especially if they live in states with high income and property taxes. As a result, they lose the ability to deduct the full amount of their state and local taxes, leading to higher federal tax liability.
Can I deduct both property tax and state income tax?
Yes, but the combined total of all state and local tax deductions including property, income, and sales taxes cannot exceed $10,000. Any amount above that cap is not deductible.
Does the SALT deduction cap affect my standard deduction?
No, the SALT cap only applies to itemized deductions. Taxpayers who choose the standard deduction are not affected by the SALT deduction cap because they aren’t itemizing deductions at all.
Are any taxpayers exempt from the $10,000 limit?
Generally, no. The cap applies to all individual filers and married couples filing jointly. However, certain trusts and estates may have different rules, but most everyday taxpayers are subject to the cap.