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Paying taxes once is painful enough. But you may be able to avoid paying taxes twice on the same income by using the federal state and local tax (SALT) deduction. However, this deduction may not be of much use to you unless you have a lot of other deductions.
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How does the SALT deduction work?
The SALT tax deduction allows taxpayers to reduce their federally taxable income by as much as $10,000.
The deduction is for people who itemize deductions rather than taking the standard deduction — an amount the IRS allows you to knock off your taxable income without any specific documentation. For tax year 2022 (filed in 2023), the standard deduction ranges from $12,950 up to $25,900, depending on filing status. In 2023, it ranges from $13,850 to $27,700.
If the SALT deduction and your other write-offs don’t add up to more than the standard deduction, it may not be economical for you to itemize. For taxpayers who do itemize, there are other factors to consider.
» What else can you write off? Tax deductions and tax credits
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What is the SALT deduction?
There are a number of taxes covered by the SALT tax deduction. But for a few of the big ones, you might have to make a choice: You can deduct local and state income taxes or state and local sales taxes. Not both.
Let’s go over these deductions one by one.
SALT deduction for income taxes
If you get a W-2 wage and tax form from your employer, it’s pretty easy to see what you’ve paid in state or local income taxes over the course of the year. You can use the information on that form to figure out how much state or local income tax you might be able to deduct.
If you are self-employed, note that you can also deduct any estimated taxes you might have paid to your state or local government over the course of a tax year.
And if you had to make any payments on prior year state or local taxes, you can deduct those, too.
SALT deduction for sales taxes
If you decide it’s a good idea to deduct sales taxes rather than income taxes, there are a few ways to do this. If you have really good records of the sales taxes you’ve paid over the course of the year, you can use those to calculate the exact amount of your deduction.
But not everyone is able to hang onto receipts from each taxable purchase they made throughout the year. So the IRS also offers a sales tax deduction calculator to help you figure out what you can claim.
SALT deduction for property taxes
Generally speaking, you can claim property taxes with your SALT deduction. But some types of payments do not qualify. The IRS says deductible real estate taxes are “levied for the general public welfare. The charge must be uniform against all real property in the jurisdiction at a like rate.”
So, which types of property taxes might not be deductible?
Some taxes assessed by state or municipal governments pay for special benefits for a particular district. Maybe they pay for new sewers for one neighborhood or better sidewalks for a specific area. Because these taxes, and benefits, don’t affect the entire tax base, they aren’t deductible.
Similarly, there are certain loan programs — say for energy-saving programs — whose repayment comes from a special tax assessment. These aren’t deductible either, the IRS says.
SALT deduction for personal property taxes
You can generally deduct taxes levied on personal property such as a boat or a car. If the tax is based only on the value of the property, and it’s charged annually (even if it’s billed more regularly), the SALT deduction may cover it.
How much is the SALT deduction?
SALT tax deduction 2023
The maximum amount you can take for the SALT deduction for 2023 (taxes filed in 2024) is $10,000 ($5,000 for married couples who file separately), the same as it was for tax year 2022.
Why is there a SALT cap?
So why is there a cap on the SALT deduction? And why doesn’t the cap adjust for inflation like some other parts of the tax code?
The limit on the SALT deduction comes from the 2017 passage of the Tax Cuts and Jobs Act under President Donald Trump. As a way to pay for some of the other programs in that law, Congress decided to limit SALT deductions.
The cap is set to expire in 2025. Nonetheless, the SALT deduction has been a live political debate ever since the limit took effect, and it tends to come up whenever Congress begins debating tax policy.
On one hand, the cap increases federal revenue by limiting deductions while mostly sparing the lowest-income taxpayers. After all, you have to both itemize deductions and have more than $10,000 in state and local taxes to have the limit affect you.
Still, there are plenty of taxpayers who have to pay more in taxes because of the deduction limit, particularly in higher-cost, higher-tax states. For example, a taxpayer in New York or California may have more eligible deductions that exceed the cap than, say, a resident of Tennessee, where the state and local tax burden is lower.
What taxes aren’t covered by the SALT deduction?
The IRS says you can’t use the salt deduction for “federal income taxes, Social Security taxes, transfer taxes (or stamp taxes) on the sale of property, homeowner's association fees, estate and inheritance taxes, and service charges for water, sewer, or trash collection.”
Why is it called the SALT tax?
SALT is an acronym for “state and local tax.” It doesn’t have anything to do with the seasoning for your food.
However, if you paid attention in history class, you might remember that taxes on salt — sodium chloride — are among the oldest government taxes in the world. Salt taxes may have helped pay for the Great Wall of China, for instance. And in Europe, excessive taxation on salt is among the factors credited with inspiring the French Revolution.
Today, if you’re paying taxes on salt, it might be through a sales tax on food or other salty products. In theory, you could deduct the cost of that tax using the SALT deduction.
On a similar note...