In the first part of my Schedule A series, I took a look at medical and dental expenses. In that post, I gave a summary of why people can benefit from itemizing their deductions. Also I gave a overview on how to deduct medical and dental expenses. I also gave a summary of what people can and cannot claim as deductible medical and dental expenses. Along with the limits on deductions, imposed by the IRS. For the second entry in this series, we move down exactly one section on Schedule A, taxes paid.
SALT – State and Local Taxes
Frequently acronymized as SALT, state and local income taxes in theory exist to offset some federal taxpayer liability by excluding income already remitted in taxes for state and local government services. State and local taxes are generally defined as the income taxes for your state and any local property taxes you might pay. This can also include any state income taxes, or sales taxes. The signing of the Tax Cuts and Jobs Act, changed these deduction immensely. A cap was put on the amount of state and local income taxes you can claim as deductions. The maximum amount of state and local income taxes is set at $10,000, set to expire in 2025.
State Income Taxes Vs. State Sales Tax
I’m sure the more astute readers are asking themselves “Wait, state income tax or state sales tax, you can’t deduct both?”. Unfortunately you will have to pick between your state income taxes or your sales taxes. Essentially you can combine your property taxes and state income taxes (local income taxes as well), into one deduction. Or you can combine the property taxes and sales taxes. This is a rare situation but it could be useful for tax payers that live in high sales tax areas.
The gist of this section of Schedule A is that your SALT taxes have to be under $10,000. This was a major point of contention during the passage of the Tax Cuts and Jobs Act, and more or less, it affects high income earns more than it effects most taxpayers who mainly take the standard deduction. However having a proper understanding of how SALT taxes work and how they interact with your return may not affect your return right this minute, but in the future you can start to plan effectively to max out your $10,000 and maximize your deductions.