Since 1913, people have been able to deduct state and local taxes, known as SALT, on their federal income tax returns. In essence, this means that the federal government through this reduction in taxes owed indirectly subsidizes state and local tax revenues. This has been an accepted part of our federal tax code for decades, but in 2018, it will be significantly capped.
The limitation will be in effect through tax year 2025.
SALT deduction changes
Currently, a taxpayer may deduct either state and local income taxes or state and local sales taxes, plus all state and local property taxes. The new cap will limit this deduction to $10,000 for both single and married filers. The $10,000 cap is for income or sales taxes plus property taxes in combination.
In California, we have relatively high income and property taxes, so this cap will likely have a negative impact on many people, especially those at higher income and asset levels. Legislation has been proposed on the state level that would let a taxpayer make a contribution to the “California Excellence Fund” as a charitable contribution to the state instead of paying the money to the state directly as taxes.
The idea is that the amount paid to the fund could then be credited against the taxpayer’s state income taxes due and taken as a charitable deduction on the federal return. Many commentators question whether this approach would stand up with the IRS as a genuine charitable donation with charitable intention.
Stay tuned. We will carefully monitor developments on both the state and federal level to provide current advice to our clients about the SALT deduction cap.