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What is the SALT Deduction?

For residents living in California and other metropolitan areas with a high cost of living, you may be wondering why you cannot deduct all of your state and local income taxes (SALT) and/or your property taxes.

 

A brief history of the SALT deduction

Prior to 2017, there was no cap on SALT deduction. As part of the Tax Cuts and Jobs Act (TCJA), many Republicans argued that the tax break was disproportionately benefitting high-income earners and those living in high cost-of-living areas. Because of this, as part of the TCJA, a cap was put on the deduction at $10,000 per household. This includes property taxes plus state income or state taxes, but not both. 

How the infrastructure bill may affect the SALT deduction

The Biden administration is currently trying to move forward with a $2 trillion infrastructure bill, and with it, Democrats may reintroduce the SALT deductions and move to remove the caps currently in place. It may be an area for negotiation where nothing changes in order to get something else passed, but there is a possibility for modification that may affect taxpayers.

 What can investors do?

A key strategy to tax reduction planning is the use a Roth conversion. It’s important, however, that you do not use this strategy early in the year and instead wait until the end of the year. This is because a Roth conversion is not reversable once executed and so it’s best to have the most up-to-date information available to you. If the SALT cap gets removed, that would mean that you may have bigger deductions in the future. With the possibility of a larger deduction in the future, taxpayers will want to run a projection to see the benefits of waiting for a larger roth conversion. If you have any questions as to how the current SALT deduction, pending infrastructure bill, or Roth conversion may affect your financial plans, please contact us today.

Sincerely,

The Team at Chatterton & Associates

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

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