The deduction for state and local tax (SALT) payments may have been one of the biggest tax deductions on your personal tax return—if not THE biggest—for many years. But the massive Tax Cuts and Jobs Act (TCJA), enacted at the end of 2017, caps the SALT deduction for 2018 through 2025. Nevertheless, this still may be a sizeable write-off on your 2020 return if you expect to itemize deductions.
Background: Previously, you could deduct the full amount of SALT payments on Schedule A of your return, along with other itemized deductions. This was particularly beneficial to residents of states with high tax rates.
However, the TCJA increases the likelihood that you will not itemize deductions by effectively doubling the standard deduction and suspending certain deductions. Notably, it also limits the annual SALT deduction to $10,000. In other words, if you pay $25,000 in state and local taxes this year, you can write off only $10,000. These changes are effective for 2018 through 2025.
New tax reality: When you compare the standard deduction to your itemized deductions, figuring in the $10,000 SALT limit, the standard deduction may now be higher. For 2020 returns, the inflation-indexed standard deduction is $12,400 for single filers and $24,800 for joint filers.
On the other hand, if your itemized deductions exceed the standard deduction amount, you may still benefit from a maximum SALT deduction of $10,000.
Be aware that the SALT deduction generally comprises three elements. Typically, you may be able to write off state and local —
- Property taxes on real estate like your principal residence, a vacation home or vacant land, as well as taxes on personal property.
- Income taxes paid to the appropriate state and local tax authorities.
- Sales taxes on goods and services purchased in your state (subject to certain exceptions and special rules).
Important: The SALT deduction is available only for a combination of (1) state and local property taxes and (2) either state and local income taxes or state and local sales taxes. So, you cannot count both income and sales taxes toward the $10,000 limit.
This is an easy decision for taxpayers residing in the nine states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming—that do not impose any state income taxes on wages. Obviously, you should take the sales tax deduction. Taxpayers in states with extremely high income taxes, like California and New York, typically go the opposite way. Those in the middle are advised to make a comparison.
When you figure out the amount of sales tax you can deduct, you can use one of two methods.
- If purchases are substantiated, you may write off your actual expenses. Comb your records to find the annual total.
- Alternatively, you may claim the deduction from an IRS table providing a flat amount for your state of residence and family size. This will often produce a smaller deduction than the actual expense method, but it is more convenient. Plus, you can add sales tax paid for vehicles, boats and home improvement materials to the table amount.
Your professional tax advisor can provide any guidance needed to claim the maximum deduction.