Since the 2017 passage of the Tax Cuts and Job Act (TCJA) taxpayers have been able to deduct only $10,000 for their payments of State And Local Taxes (SALT). Now there are proposals in Congress to change the cap, perhaps – and perhaps not – for the 2021 tax year. The uncertainty makes tax planning less of a spreadsheet exercise and more of a Ouija Board experience.
The SALT limitation caused people in high tax/high services areas like the Bay Area in California to pay more taxes to the Federal government. The deductions for state income tax, local property taxes, and other fees were capped at a level substantially lower than what people were paying and had previously been able to deduct.
Coupled with a new limitation on mortgage interest deductions and the 85% increase of the standard deduction to $24,000 for couples filing jointly, many people in high-SALT areas were forced to accept the standard deduction and absorb extra Federal taxes.
Of course, paying higher taxes is unpopular, and earlier this year there seemed to be a Congressional majority in favor of increase the SALT deduction in 2021. However, the overall Build Back Better bill, which included higher SALT limitations, has stalled in the face of united Republican opposition and the wavering of Democratic Senator Joe Manchin.
Upping the SALT limit remains very popular, according to most crystal balls. One proposal says the new limit will go from $10,000 to $80,000 for everyone. Another says the $80k limit would be only for people below a certain income level, perhaps $400,000. But, nothing has passed Congress and therefore nothing is certain.
What does this mean for 2021 tax planning? Ugh!
Most tax professionals, myself included, think that any change to the SALT limitation will take effect in 2022, if it passes at all. Therefore, we are recommending that our clients plan for 2021 with the $10k SALT rules.
We are recommending that clients with pass-through entities take advantage of the California law that has the business pay the SALT taxes instead of the individual (see our SALT Deduction alert).
For moderate income taxpayers we are also having them double-up deductions, such as charitable contributions, in one year and not doing any the next. This way, deductions like charitable gifts, coupled with the $10,000 SALT allowance and mortgage interest payments, will be more than the standard deduction every other year.
Of course, if the SALT limitation is changed retroactively, then most clients will itemize expenses every year and their Federal tax will go down. Unfortunately for a few clients with pass-through entities, the extra work in having their entity pay the California taxes will not be cost effective in 2021 if the limit is raised.
We think a retroactive increase in SALT really is unlikely, but…
RINA will update our community on the progress of SALT changes and their implications for taxpayers. However, Congressional action on changing the limits won’t occur until after December 31st, too late for tax planning!
I suggest that you act as if no changes in SALT limitations will occur in 2021,… unless you’re given a holiday Ouija Board that tells you to take a different course of action.
Kelly Creed, CPA, is a Partner with RINA, Co-Managing Director of Tax. Kelly has been with RINA since 2003 and has over 18 years of experience working with closely held businesses in the retail, franchising, and real estate industries. As a member of RINA’s Real Estate Group, Kelly advises clients in the areas of space acquisition analysis, real estate valuations, tax consequences of real estate, and decision analysis of commercial real estate investments. As the Co-Founder of RINA’s State & Local Tax (SALT) Group, Kelly is closely familiar with the complexities of operating businesses in multiple states.