SALT (State and Local Tax) Deduction
The state income tax or sales tax you pay is tax-deductible along with the property taxes you paid. The State and Local Tax deduction or shortly known as the SALT deduction allow taxpayers to reduce their taxable income on federal income returns.
If your state taxes your income, you can deduct how much you paid on your federal income tax return. As for the sales tax deduction as part of the SALT deduction, you must choose to deduct either your sales tax or state income. Same as any other tax situation like this, we suggest deducting the one that grants you the highest deduction.
While you must pick either state income taxes you paid or the sales tax, there is no limit in property taxes paid. You can simply deduct property taxes with state income or sales tax you paid.
SALT Deduction Limit
The Tax Cuts and Jobs Act of 2017 brought changes to the State and Local Tax Deduction. It capped the deduction limit at $10,000 for single, married filing jointly, and head of household. On the other hand, those who are married but filing separately will only be able to deduct half of this — $5,000.
Keep in mind that you can only claim the SALT deduction if you itemize. Thus, you’re planning on taking the standard deduction, you cannot claim this deduction.
Maxing Out SALT Deduction
Not everyone is going to be able to max out SALT deduction to $10,000 but your state may help you with that. Most states passed new tax laws where taxpayers can make charitable contributions to government funds and get a state tax credit in return.
If you can benefit from this, you should be able to max out the SALT deduction by converting the lost SALT deductions to charitable deductions. This is a deduction coming from both ways since these are deductible for itemizing taxpayers.
Should you itemize to claim the SALT deduction?
If you’re living in a high tax rate state like California or New York, chances are you will max out the SALT deduction. Given the standard deduction is expected to be increased to $12,600 in 2023, the SALT deduction alone can be as much as the standard deduction. Added with a couple of itemized deductions such as the medical expenses, you surely will be get more than the standard deduction only with these deductions.
However, your filing status matters a lot. If you’re married filing jointly, you may be better off with taking the standard deduction if you don’t have itemizable deductions that can supplement the SALT deduction to $25,200. With that said, you should itemize if the other deductions you can claim exceeds the standard deduction for that given tax year.