In 2017, when the Tax Cuts and Jobs Act of 2017 passed, there was much focus on the large tax rate reductions being enacted for corporations. It would also benefit wealthy families that are legally registered as corporate entities for tax and investment benefits. Many didn’t realize that also buried in the code was a lowered federal deduction for state and local taxes, or SALT tax.
Taxpayers—primarily homeowners—were previously able to deduct $20,000 or more in municipal property taxes in some states. However, beginning in 2018, homeowners were not able to deduct more than $10,000 in combined SALT taxes, including state income taxes. Legislatures among states with the highest city and state taxes quickly saw the enormous impact the change would have and passed laws to protect homeowners while also incentivizing them to give to charitable causes.
The IRS added rules to modify the code, allowing taxpayers to only include 15% of charitable giving as a SALT tax deduction. States followed suit. Some speculate that predominantly blue states were impacted by the change and salt tax rule was politically motivated. Either way, it left homeowners scrambling to find a means to pay higher income tax bills. Approximately 11 million people in total continue to be affected.
The states fought back against SALT Tax changes
The IRS hasn’t been entirely transparent in communications with the Department of Treasury about clarifications or modifications to the new rules. What’s more is, because the lingering uncertainty over what is an allowable deduction, some charities are reporting that donations or gifts have slowed. Residents in states like New York, New Jersey, Oregon, Maryland, and California—all of which have relatively high state taxes—needed to be extra diligent in how they prepared their tax 2018 tax filings so as to not inadvertently be stuck with a large bill, or worse, an IRS audit.
Unfortunately, there isn’t always a workaround for taxpayers to avoid owing the IRS money. Some families, however, have taken the drastic step of moving to lower their property tax and overall SALT tax burden. As just one example, CNBC describes how some families in New Jersey moved to a nearby town with lower property taxes to offset the impact of the new rule. What it boils down to is this: the situation will vary depending on your particular financial situation and location. Consulting a tax professional is necessary to help navigate this complicated terrain.
The IRS changed the playbook
The IRS itself has issued a guide on how to comply with the new tax code which undoubtedly does not instruct the reader on what can legally be done to pay fewer tax dollars. It does, however, clarify where it disagrees with the states on charitable donations as an exception to the SALT tax rule. What is unique about the law change is just how much your tax liability can play out differently from state to state.
Some state laws are stronger than others for charitable contributions because they existed before the rule was introduced. We have likely only seen the beginning of legal actions against the US regarding the controversial law and the obscurity around how it’s being enforced. Lower municipal rates get followed very closely these days and, of course, people who are financially liquid can start house shopping and calling up a moving truck.
Getting the best SALT Tax guidance
You can definitely read the IRS guidelines for yourself and attempt to comply with the changing guidelines, but this can be tricky. Tax code has so many intricacies and complexities that it can be easy to miss important details. Mistakes can land in you in trouble with the IRS or cause you unforeseen financial burdens further down the line.
The tax professionals at SD Mayer stay on top of every crucial change and can help you track what you need to know, put into place the best financial strategies for your situation and location, and will work with you every step of the way in developing a holistic wealth management plan that includes abiding by any necessary SALT tax regulations. Partnering with an expert can give you peace of mind and an added layer of financial protection.
Tax accounting is a evershifting world, but you don’t have to navigate it alone. Our certified accounting team can guide you through these complex processes—for you or your business.