State and Local Income Tax Limitation

Now that the midterm elections are over, most of us are going back to focusing on business. With weeks left of 2018 thoughts are shifting in the direction of tying up loose ends to get ready for tax season.

 

Speaking of which, you’ve probably noticed tax codes are in flux this year. Both tax preparation and payment are affected.

 

Is this good news? In certain instances, yes, and in others, results can not only be disquieting but also hit taxpayers hard where it hurts—the wallet.

Which side of the fence do you sit on—or are you straddling it? The effects of recent tax code changes will depend on many factors.

 

One specific tax code change has the attention of business owners across the country. There’s been a big shake-up with limitations imposed by SALT (State and local Tax Limitation).

 

More than a handful of business owners are concerned by controversial changes on deductions being brought about by SALT.

 

If you live in a state with high income and property taxes, you could lose out under the new tax plan. On one level, write-offs are comforting. They are our one defense against rising income taxes. But you may have lost one or more of those write-offs you once counted on.

 

How Will This Translate into Dollars and Cents?

 

Limiting deductions on state and local taxes coupled with other itemized deduction reforms is on point to raise an estimated $668 billion over ten years. The SALT limitation pays for many of the 2017 tax cuts so the IRS needs to be strict.

What’s the Projection?

 

Since the passage of the act, an estimated ninety percent of taxpayers will decline to claim any kind of itemized deductions; the incentive being the promise of being able to file postcard-like tax returns.

 

About five percent of taxpayers will itemize their returns. They will have state and local income tax deductions below the SALT cap.

 

What happens to the remaining five percent of taxpayers whose state and local income deductions are limited by the SALT limitation? Well, they will feel a little pain.

 

If you happen to fall into this category, is there anything you can do as one of the less fortunate five percent limited by SALT?

 

There is a charitable workaround, but if it doesn’t work for you here are a few more options:

 

Pack Your Bags

 

You could pack up and move to a low tax state. This is not a new idea. Businesses and other taxpayers have done this for years when they get hard in their pockets. There’s one problem with this. Many of those most likely to be affected are licensed professionals such as accountants, doctors, brokers, and others who can’t just pick up and move.

 

Create Non-grantor Trusts

Consider creating one or more non-grantor trusts (within established regulations) and shift your property tax payments and residence to a trust with its own SALT limit ($10,000).

 

Create Non-grantor Trusts in No-Tax States

You may want to consider whether there is an advantage to creating a non-grantor trust in no-tax states and then transfer your non-pension portfolio assets away from your high-tax state so you can avoid paying income tax in that state.

 

Tax planning was difficult enough before recent tax code modifications. The SALT act has made traditional planning even more difficult. Contact one of our tax professionals for advice on how to begin NOW making changes so you’re not surprised on April 15th.

 

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