The New Tax Law: State and Local Tax Deductions
13 Februar 2018 - 6:49PM
Dow Jones News
By Laura Saunders
In a landmark change, the new tax law put a cap on deductions
for state and local taxes, or SALT. Previously these deductions
were unlimited for individuals, though many people who owed the
alternative minimum tax lost the benefit of some or all of these
write-offs.
For 2018, taxpayers can deduct property and income or sales
taxes, but only up to $10,000 per return.
For example, say that Don is a single filer who owes $6,000 of
state-income tax and $6,000 of local-property tax. For 2017, he can
deduct the $12,000 total of these taxes. But for 2018, the
deduction is capped at $10,000 per return.
According to the Tax Foundation, this change is expected to hit
hardest in the six states where SALT deductions are highest as a
percentage of income: New York, New Jersey, Connecticut,
California, Maryland, and Oregon.
Lawmakers in some states are considering strategies to preserve
the deductibility of state and local taxes. One proposed fix would,
in effect, convert these levies to charitable contributions that
could be deducted on the federal return, while another would change
part of the state income tax into a payroll tax that is deductible
by the employer. It isn't yet clear whether these strategies are
legally viable or will take effect.
The new cap will also affect many married couples who file
jointly more than it will affect singles, as the $10,000 limit is
per return and not per person.
Some Wall Street Journal readers have asked whether two spouses
can each file separately for 2018 and claim two $10,000 deductions.
The answer is no. Although married couples can file separate
returns, in this case each spouse would get a $5,000 deduction for
state and local taxes. To qualify for two $10,000 deductions, the
couple would have to divorce.
Others are confused about whether prepayments of state and local
property taxes for 2018 are deductible on 2017 tax returns. The new
law specifically bars deductions for 2017 of state income-tax
payments if they are earmarked for 2018 taxes, but it doesn't
explicitly address property-tax prepayments.
Many residents rushed to prepay property taxes for 2018 before
the end of 2017. But late in the year, the IRS issued a warning
saying that some property-tax prepayments might not be allowable on
2017 returns.
Thomas Barthold, chief of staff of Congress's Joint Committee on
Taxation, said publicly in early February that lawmakers didn't
consider whether to bar deductions for prepayments of 2018 property
taxes, in part because some locales have fiscal years.
The law in this area can be confusing and local practices vary,
so tax specialists advise seeking local guidance. Some believe that
prepayments of property taxes aren't deductible if they are
estimates that are subject to change.
Others disagree. According to Lawrence Axelrod, an attorney at
Ivins, Phillips & Barker in Washington, taxpayers and their
preparers have good authority for claiming a deduction on a 2017
return for "a good-faith estimate of 2018 property taxes paid in
2017. But the prepaid taxes shouldn't extend beyond 2018."
Write to Laura Saunders at laura.saunders@wsj.com
(END) Dow Jones Newswires
February 13, 2018 12:34 ET (17:34 GMT)
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