SALT Credits – A Handy Guide to State and Local Tax Credits

When it comes to matters regarding taxes and tax breaks, it’s important to know where you stand. The demand for professional tax services as of late is greater than ever before and if you’re a taxpayer yourself, you’ll instantly understand exactly why that is.

For anybody who is a taxpayer, not only does it pay to seek professional help, it also pays to understand the various tax breaks and deductions which could be available to you.

State and local tax credits for example, have been a hot topic as of late as it can potentially save you money in the form of a very handy deduction.

But what exactly are SALT credits and what is the important info that you need to know? Well, all will soon become clear as we share a very handy guide with you all about state and local tax credits.

What exactly is state and local tax?

State and local tax, also known as SALT, is typically associated with federal income tax deductions for state and local tax which is available to taxpayers who are able to enumerate their tax deductions.

Back in 2017, there was a $10K ceiling placed upon what was previously an unlimited SALT deduction, which was made available for tax years which began in 2018 onwards, through to 2025.

SALT credits however, have been quite controversial because this limit on the deduction has been responsible for fierce political debate as officials in states with high taxes, and those on large incomes, have strongly opposed it.

So, which state and local taxes are deductible?

When talking about SALT credits, you need to understand what is and is not deductible.

If you’re an individual tax payer who itemizes your personal deductions, you can deduct up to a maximum of $10,000 of your aggregated State and Local Taxes per year. For married persons who file separately, your deductions will be $5,000.

You should also be aware that this limitation does not apply for taxes accrued or paid in carrying on a business or a trade, or which as been incurred as an expense in an income producing activity.

Deductible taxes include state, local and foreign taxes on excess profits, war profits, and income, as well as state and local taxes on real property and personal property.

As a taxpayer, you may also opt to deduct state and local general sales taxes in place of income tax deduction claims. Deductible state and local taxes include:

  • Taxes on motor vehicles
  • Taxes for the storage, use, or consumption of items
  • Taxes on retail sales and on similar ‘compensating use’

Also, if the transfer is included as part of the taxpayer’s income, taxes imposed on particular generation-skipping transfers by trusts and estates are also deductible.

Who can use SALT credits and deductions?

Not every US citizen will be eligible to take the SALT credits and deductions.

If you’re a high-income tax filer, you will be more likely to itemize your tax return, which means that you will therefore be much more likely to take and benefit from the SALT deductions. This is obviously very beneficial because the more you earn, the higher your income tax bracket will be so you’ll therefore make much more considerable savings.

Basically, in high productivity states and cities, the government is subsidizing high earners. Wealthy residents of wealthy states are typically much more likely to pay state and local taxes, and they also typically find that they have the largest SALT credits and deductions, on average at least. In fact, studies have found that individuals with incomes over $100,000 P/A receive over 88% of benefits from SALT deductions.

Origins of SALT credits

This particular $10K ceiling tax plan was signed by former US President Donald Trump, when he was in office in 2017.

What was initially known as the Tax Cuts and Jobs Act, instituted a cap on SALT deductions. Beginning in 2018, the maximum SALT deduction available to taxpayers, as previously mentioned, was $10,000.

Before this however, there was no limit, so you can see why it has been quite the source of controversy as of late.

SALT credits and charitable donations

Particularly relevant to SALT credits are charitable donations.

Under Sec. 170(a)(1) taxpayers are eligible for a charitable reduction, if charitable donations are made to a state, the District of Columbia, a political subdivision, or a U.S possession, in addition to community funds, chests, some corporations, foundations organized and operated wholly for religious, charitable, literary, scientific, or educational purposes, or to foster amateur sporting competition, or to prevent cruelty to children or to animals and living beings.

What is worth noting is that an amendment was made which states that, should a taxpayer donate to any of the above in exchange for SALT credits, the taxpayer must reduce their contributions to the charity deductions by the total amount of the SALT credit. This is because it is considered to be what is known as a ‘return benefit’.

What to do if you’re unsure about SALT credits?

As you probably know wrapping your head around the intricacies surrounding taxes can take a long time, and can be a real nightmare for some people.

If you feel that you could benefit from SALT credits but are still unsure about where you stand and how to go about benefitting from these deductions, the best advice we can give here is to contact a tax lawyer or professional tax services, explain your situation, and let them handle things for you.

These are true professionals who know all of the tricks of the trade and know where you stand legally. They can tell you what you need to know, they can file your return for you, they can help you to save money, and they can help you to reduce your expenses and tax liabilities.

Get professional tax help today by calling us at 1-877-788-2937.

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