State and Local Tax Deduction (SALT)

State and local taxes can be deducted from federal income taxes for those who itemize their deductions, and this deduction is known by the acronym SALT, which stands for state and local tax. A $10,000 cap was put on the formerly unlimited SALT deduction in 2017.

Intense criticism has resulted from the ongoing political dispute that the deduction's cap has sparked with high-income citizens and leaders in jurisdictions with high taxes.

Understanding SALT

Individual taxpayers who itemize their personal deductions are permitted to deduct up to $10,000 ($5,000 for married couples filing separately) of their combined local and state taxes each year from their returns. The limitation does not apply to taxes that have been paid, accrued, or incurred as costs of doing a trade or business or an activity that generates income.

Deductible taxes include state, municipal, and foreign taxes on income, war profits, and excess profits, as well as state and local (but not foreign) taxes on personal property and real property, including sums paid to cooperative housing corporations for real estate taxes.

In lieu of claiming an income tax deduction, taxpayers can deduct state and local general sales taxes. Taxes on retail sales, comparable "compensating use" taxes for the use, storage, or consumption of commodities, and motor vehicle taxes are all deductible state and local sales taxes.

Taxes levied on some income distributions made by trusts and estates in connection with generation-skipping transfers are also deductible if the distribution is included in the taxpayer's income.

Federal Revenue Impact

The impact of the SALT deduction limits on government revenue is a major concern for opponents of the limit. The $10,000 SALT deduction limit has a large and demonstrable revenue impact on the federal budget.

According to the Joint Committee on Taxation, increasing the restriction on SALT deductions for married individuals in 2019 and eliminating deductions in 2020 and 2021 would lower revenues by a total of $184.5 billion between 2019 and 2024.

Efforts To Alleviate Or Eliminate Salt Ceiling

Shortly after the SALT tax deduction was capped, a development that disproportionately impacted taxpayers in areas with high income and property taxes, efforts to reinstate the previously unlimited benefit began.

Recharacterization As Charitable Contribution

States reacted immediately to the SALT deduction cap, taking a variety of methods to lower the federal tax burden on their citizens as well as the poor political environment that it generated for state and local taxation. Several states' initial efforts to allow residents to contribute to a state charitable fund instead of paying income taxes were stymied by final regulations published by the United States Treasury Department to counteract this method.

Conclusion

  • For taxpayers who itemize their deductions, SALT stands for state and local taxes related to the federal income tax deduction.
  • The formerly unlimited SALT deductions now have a $10,000 cap that is effective for tax payers between 2018 and 2025.
  • Individual taxpayers who itemize their personal deductions are permitted to deduct up to $10,000 ($5,000 for married couples filing separately) of their combined local and state taxes each year from their returns.
  • Large revenue losses for the government are predicted by the Joint Committee on Taxation as a result of restrictions on SALT deductions.
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