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Demystifying SALT: A Guide to State and Local Taxes

SALT stands for state and local taxes, which are levied to fund various public services and programs. This may include but is not limited to education, transportation infrastructure, healthcare, public safety, and social welfare. The specific types and rates of SALT can vary significantly from one state or locality to another. In this guide, we’ll take a look at the taxes covered under SALT, as well as your ability to deduct these taxes on your federal income tax return.

What Taxes Are Covered Under SALT?

There are various types of state and local taxes covered under SALT, including:

  1. Income Tax. Most states impose income taxes on individuals and corporations, although the rates and income brackets vary. Nine states – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Taxes, Washington, and Wyoming, do not levy state income taxes.
  2. Sales Tax. This tax is collected on the sale of goods and certain services at the point of purchase. Sales tax rates vary by state and differ within local jurisdictions.
  3. Property Tax. Property tax is levied on the value of real estate properties, such as homes, land, and commercial buildings. The tax rate is typically based on the assessed fair market value of the property.
  4. Excise Tax. Excise taxes are imposed on specific goods or activities, such as gasoline, tobacco, alcohol, and certain luxury items. These taxes are often used to discourage the consumption of certain products or to fund specific programs.

Other state and local taxes, such as estate and inheritances taxes or utility taxes, do not qualify under SALT.

Can I Deduct SALT From My Federal Taxes?

You can deduct SALT from your federal income taxes, but the rules have changed over the years. Historically, you could deduct the majority of your state and local taxes from your federal taxable income. The Tax Cuts and Jobs Act  (TCJA)of 2017, however, placed a limit on the deduction amount.

If you itemize your taxes, you may currently deduct up to $10,000 annually (single or married filing jointly). Taxpayers who are married and file separately may only deduct up to $5,000 each. It’s also important to note that you can deduct either your local and state income taxes or sales taxes, but not both.

Will The Deduction Limitation Be Removed in The Future?

The current deduction cap of $10,000 is set to expire in 2025. Whether Congress decides to make it permanent remains to be seen. Recent legislation proposed could either repeal the $10,000 cap or increase it to $100,000 (or $200,000 if filing jointly with a spouse). There are also efforts to make the cap permanent.

Prior to TCJA, nearly 30% of all taxpayers itemized on their federal returns. For those with incomes over $500,000, the percentage is nearly 93%. High-income earners benefited the most from pre-TCJA SALT rules. The average SALT deduction for $1M+ earners was $282,400 in 2017 compared to $10,000 today. Even those in the $200,000 to $500,000 range averaged more than double the current deduction amount.

We expect to see taxpayers in states with higher income taxes push to have the SALT deduction increased or repealed altogether. The outcome of the 2024 Presidential Election, however, will also likely play a role in how SALT is treated moving forward.