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How might the cap on the property tax deduction affect your taxes?
August 1, 2019
Before 2018, tax filers who own a real estate asset didn't need to pay additional federal taxes if they paid SALT taxes. SALT stands for State and Local Tax and it allows you to itemize real estate deductions for claiming them on your federal tax return. SALT includes property taxes, state and local income taxes and sales taxes.
The limitation
However, the Tax Cuts and Jobs Act
limits this option by putting a cap on claimable SALT deductions. This includes property taxes as well. This limit could persuade the taxpayers for reduced itemization.
The limit is that tax filers can deduct a maximum of $10,000 for all state and local taxes if you are a single tax filer. This includes income or sale taxes and property taxes. The limit reduces to $5,000 if you are married but intend to file separately.
Impact on residents of certain states
The high earning taxpayers will be affected throughout the country as chances are that they own high-value properties. However, different states have different state taxation laws. This makes residents of certain states more susceptible to paying large tax amounts.
States with the highest SALT taxes are:
| 1. California | 6. Hawaii |
|---|---|
| 2. Oregon | 7. Minnesota |
| 3. Iowa | 8. New Jersey |
| 4. Vermont | 9. District of Columbia |
| 5. New York | 10. Wisconsin |
Residents of these states will be the most impacted due to the high tax rates. The inability to compensate the SALT taxes as an itemized deduction is going to be a difficult situation for them.
Measures adopted by the States
The states of New York, Maryland, New Jersey, and Connecticut brought a lawsuit which is intended to overrule the limits of $10,000 and $5,000 for SALT itemized deductions. The lawsuit claims that this imposed cap undermines the tax precedence of 150 years. Which essentially prevented the federal government to interfere with the authority of states over localized taxation policies.
The New York state budget had proposals for allowing the residents to make charity donations to a fund in order to reduce the state tax liability. This is proposed because charity donations can still be deducted from the federal tax returns. An option was also proposed in the budget for implementing a new payroll tax which is aimed at replacing a portion of state income taxes of the employees. This is suggested because as payroll taxes are still deductible for the employers.
Exploring your options
If you will be losing a considerable amount of money in the property taxation due to the limit on itemized deductions then you must compensate for your loss by exploring all available options. Some of which are;
If you are doing an energy efficient renovation of your house then this amount can be deducted when filing for tax returns.
The interest on home equity loans can be deducted if the amount is utilized for building, purchasing or making considerable improvements to your house.
The interest for mortgages before Dec 14, 2017, can be deducted. The limit is $1 million if you are a single tax filer and it is $500,000 if you are married and intending to file separately.
Please reach out to us at https://cartiercpas.com/ for more information about the New Tax Reform so we can help you prepare or email us at info@cartiercpas.com.
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