Requirements to receive up to $10,000 for State and Local Taxes (SALT): Credit and deductions

The State and Local Taxes (SALT) deduction is a provision in the federal tax code that allows taxpayers to reduce their taxable income by deducting certain state and local taxes paid throughout the tax year, called itemizing. These deductible taxes include property taxes, and either state income or sales taxes, depending on the taxpayer’s choice.

Itemizing involves listing specific deductible expenses, such as mortgage interest, charitable contributions, and, important to the SALT deduction, qualifying state and local taxes.

The Tax Cuts and Jobs Act (TCJA) implemented changes to the SALT deduction starting in the 2018 tax year. Under the TCJA, the deduction for state and local taxes is capped at $10,000 for individuals and $5,000 for married individuals filing separately. This limitation can be particularly impactful for individuals residing in high-tax states where property taxes and state income taxes often exceed this threshold. as before 2018 there was no limit.

What is the point of SALT deductions?

The SALT deduction plays a role in mitigating the impact of double taxation, where income is taxed at both the federal and state or local levels. It aims to prevent taxpayers from being unfairly burdened by high state and local taxes, recognising that these levies contribute to essential services and infrastructure at the state and local levels.

However, there are problems with this system. The $10,000 cap disproportionately affects residents of high-tax states, where property taxes and state income taxes can easily exceed this threshold.

Individuals in states with high living costs, such as California, New York, and New Jersey, often find themselves limited in their ability to deduct the full amount of state and local taxes paid.