The New Tax Law: State and Local Tax Deductions

Datum : 13/02/2018 @ 18h49
Quelle : Dow Jones News

The New Tax Law: State and Local Tax Deductions

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


(END) Dow Jones Newswires

February 13, 2018 12:34 ET (17:34 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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