Back in the old days—like, three years ago—the State and Local Tax (SALT) Deduction was arguably the most popular tax deduction in America.
You probably remember your parents or grandparents saving every receipt—even on small purchases like a box of nails or a single heirloom tomato—and stuffing them in a manila folder. That’s because, once upon a time, you could deduct an unlimited amount of sales taxes, as well as state income and property taxes, off your federal tax bill.
These days, because the Tax Cuts and Jobs Act put a limit on how much you can deduct, the SALT deduction doesn’t season your tax return like it used to. But that doesn’t mean it can’t help you cut your tax bill. Let’s find out if the SALT deduction will benefit you, and if it does, how to claim it.
What Is the State and Local Tax Deduction (SALT)?
First off, remember that a tax deduction is basically any expense that can be used to lower your taxable income. Specifically, the state and local tax deduction allows you to deduct up to $10,000 of your state and local property taxes, as well as your state income or sales taxes.
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Wait, wait, hold up—state income or sales taxes? Yep. Unfortunately, you can’t deduct both state income and sales tax (Uncle Sam sees that as trying to stick both hands in the cookie jar). You can combine property and sales taxes or you can combine property and income taxes, but not all three. Deciding which combination works best for your tax return is a part of the fun of taking this tax deduction (sarcasm intended).
The state and local tax deduction allows you to deduct up to $10,000 of your state and local property taxes, as well as your state income or sales taxes.
How Do State and Local Tax Deductions Work?
Now, before you get too excited about the SALT deduction, keep in mind that the Tax Cuts and Jobs Act put a hard cap on it. Starting with the 2018 tax year, the most you’ll be able to deduct is $10,000—or $5,000 if you’re married filing separately.
That’s not a lot, especially for taxpayers living in states with high property or state taxes. For example, let’s say you paid $7,000 in property taxes and $9,000 in state income taxes for the 2019 tax year. Well, in that case, you couldn’t deduct $16,000 from your federal income taxes. You’d have to choose the right combination of the two in order to keep your SALT deduction below $10,000 (say, $7,000 in property taxes and $3,000 in state income taxes).
How Do You Claim the SALT Deduction?
Alright, now for the fun part. Luckily, claiming the SALT deduction on your federal income taxes isn’t super complicated.
1. Itemize your deductions.
At this point, you should know for sure you’re not taking the standard deduction ($12,200 for single filers and $24,400 for married filing jointly). Again, you can only deduct $10,000, so if the SALT is your only tax deduction, don’t worry about itemizing (the standard would be higher in that case).
2. Decide to deduct either the sales or state income taxes.
Even if you’re the kind of person who spends more time looking for something to watch on TV than actually watching TV, this decision should be super obvious (thank goodness, right?): Pick the larger of the two.
For instance, if you live in a high income-tax state—like California, New Jersey or New York—you’ll probably deduct your state and local income taxes. On the other hand, if you live in a state with a high sales tax but low or no income tax—like Louisiana, Tennessee or Texas—you’ll probably deduct your sales tax if you itemize.
But now what if you spent an equal amount of money on sales and state income taxes? Well, in that case, pick the one you can back up with more evidence. You may have spent $5,000 on sales taxes, but if you don’t have receipts to back it up (or you don’t have time to dumpster dive in your filing cabinet), consider deducting the income tax.
3. Use Schedule A to claim the SALT deduction.
Finally, look at your Schedule A and report your numbers (you’ll find the state and local tax on Line 5 of Schedule A).
Who Uses SALT Deductions?
You’ll hear a lot of folks say the SALT deduction benefits taxpayers who live in states with high income and property taxes (think New York, New Jersey and California), which is partly true. But more so than that, the SALT deduction benefits high-income taxpayers who live in states with high tax rates. In fact, more than 77% of taxpayers who claimed the SALT deduction made above $100,000 for the year.1
The higher your income, the more you care about tax deductions, regardless of where you live, because—you guessed it—you’re taxed at a higher rate. So if you make a lot of money, don’t rule out the SALT deduction, even if your state has low income taxes.
Should You Take the SALT Deduction?
Here’s the deal. As we talked about above, the SALT deduction limit for 2020 is capped at $10,000. So, let’s say you plan to use the state and local tax deduction. That means the most you can deduct is $10,000. If you’re a single filer the standard deduction maxes out at $12,200 so you have to find an additional $2,200 ($12,200 minus $10,000), beyond the SALT deduction, to make itemizing your tax deductions even worth it.
That doesn’t mean it can’t be done—you can still deduct charitable givings, medical expenses, and mortgage interest—but it does mean you have to do some math.
Still Feeling Unsure? Talk to a Tax Pro.
Whether you’re still considering itemizing your deductions, or you’ve got a more—well, salty—tax situation, you shouldn’t let any eligible tax deduction go unclaimed. That’s why we recommend working with a reliable tax pro. Truth is, missing out on deductions could end up costing you more than it would to work with a pro.
Our tax Endorsed Local Providers (ELPs) will make sure you get every tax deduction and credit you deserve. They’ve got years of experience and can walk you through your tax filing with confidence.