The Tax Cuts and Jobs Act became effective as a law on January 1, 2018. If you’re like many Americans, you may be wondering how it will affect you as you begin your new tax year. The answer may lie in where you live and what you own.
Standard vs. Itemized makes the difference
Until this year, you had to choose one of two options when determining how much federal tax you would pay.
- You could elect to take a “standard” deduction and deduct one lump sum from your taxable income to determine the remaining taxable amount, or
- You could “itemize” and deduct from your taxable income all the tax-deductible payments (“items”) you made throughout the year. These might include (among others) payments made to charities, as interest on student loans and towards State and Local Taxes (which are known collectively as “SALT” and include property, income and sales taxes). If your itemized value was higher than the standard lump sum, you would generally file an itemized tax return.
New law changes value of deductions
The new law, however, adds two additional factors that will potentially complicate your tax calculations:
- It caps SALT deductibility at $10,000; you are allowed now just a $10,000 deduction for the SALT purpose each year from 2018 to 2026. Note also that the new provision requires you to make another election: you must also choose to deduct either property taxes OR income or sales taxes. You can’t deduct both property and income taxes.
- The new law also significantly increases the standard deduction from $6,350 for singles and $12,700 for married couples per year to $12,000 for singles and $24,000 for marrieds per year.
Taxpayers whose itemized values don’t rise as high as the new lump sum may pay the new standard lump sum value to reduce their tax obligation instead of the lower itemized amount.
High SALT offered higher deductibility
For residents of states that have high SALT values, however, the change in the standard deductibility rate coupled with the cap on SALT values might have a significant effect on how much federal tax they pay.
Individual states have differing levels of SALT values which will affect how residents of those states estimate their federal taxes:
- States with high SALT values allowed higher deductions. California and New York, for example, have the highest SALT values, followed by New Jersey, Illinois, Pennsylvania and Texas, and records show that itemizers in these six states account for more than half the total value of SALT deductions.
- The SALT deductions are popular, too, with over 95 percent of all itemizers taking the deduction (which represents 28 percent of all taxpayers).
- High SALT values also allow taxpayers to benefit from other itemized deductions, such as the interest paid on student loans, the number of annual alimony payments, unreimbursed corporate expenses for workers and interest on home-equity loans.
Citizens also have differing levels of SALT values based on state laws and residents’ investments. In New York State’s Westchester County, for example, almost three in every four residents pay more than $10,000 in property taxes. And all but seven states have an individual income tax. Many residents in states that assess the highest income taxes could certainly feel the pinch of having that deduction value reduced to only $10,000 (California, Oregon, Minnesota, New Jersey, Iowa, Washington D.C., and New York are the leaders). Citizens who own multiple properties might also be affected by the $10,000 SALT deduction cap. Some affected states, including California, are now seeking workarounds for this restriction.
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Tax law changes require expert evaluation
The new law changes other elements of the traditional federal tax strategy, which may or may not affect you. If you live in one of the states mentioned above or need assistance assessing your tax levels for 2018, be sure to talk to an accountant or tax attorney before making any taxation decisions.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.