Why Care About the SALT Cap?

By Lee Sherman

The Trump Administration’s "Tax Cuts and Jobs Act" enacted in 2017 was the largest overhaul of the tax code in three decades. While it mostly provides tax incentives to corporations (largely in the form of a single corporate tax rate of 21%) It includes one change that is specifically of interest to homeowners, and it’s not particularly welcome, especially if you live in a high-tax state. While many property taxes are determined at the local level, this is one time where a federal law can play an important role in how much you owe.

The SALT Cap

If you’re a homeowner in a state that requires you to pay high income and property taxes already (like California, Connecticut, New Jersey, New Hampshire, New York, and Oregon) the newish law can mean you’ll be paying more to the Feds than you might have in prior years. That’s because prior to 2017, there was no limit to the amount of state and local taxes you could deduct. But included in the pile of new tax regulations affecting tax year 2018 and beyond, the limit has been capped at $10,000 for all state and local taxes (SALT) combined. It gets worse. If you file individually, you can deduct the full amount. But if you are married (either filing jointly or separately) you can only deduct a total of $10,000 per return. There’s one ray of light. If you’re self-employed and use part of your home for business, that deduction still exists (this is an exception to the $10,000 cap).

The SALT deduction has some other limits too. If you itemize, you can deduct property taxes but you must choose between deducting income tax or sales tax but not both at the same time. Your income tax is most likely to exceed your sales tax so you’ll probably want to deduct that. But this varies from state to state. Some states (California, New York, Maryland) have high-income taxes while others (Louisiana, Taxes) have high-sales tax. To learn what’s best for your particular situation, you should consult a certified financial planner.

Looking for some good news? The new regulation, like other parts of the Trump Administration’s tax reform bill that affects individuals, is only in effect through 2025 where it will be revisited.

These changes to the tax laws are controversial but one thing seems sure. If you live in a high-tax state where property values are on the rise, you probably paid more last year and are set to do so again as the 2020 tax season rolls around.

Lee Sherman is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.