Published by Taylor Financial Group
Before the Tax Cuts and Job Act (TCJA) went into effect, homeowners in higher-taxed states (like New Jersey) were able to deduct unlimited state and local income taxes and property taxes, reducing their tax burden potentially up to 25%. These State and Local Tax Deductions (SALT) were previously unlimited until the TCJA was introduced, doing away with a major tax break for many property owners. Taxpayers who reside in a high-tax state or who own a second home will certainly feel the burden more than the tax-friendlier states
Your location matters! Those who reside in the “blue” states, such as New Jersey, New York, California and Connecticut, face the highest property taxes and SALT deductions taken by residents there are typically highest as a percentage of income. New Jersey has the highest property tax rate as a percentage of income in the nation, coming in at 2.40% for 2018, according to the New York Times. Many workarounds by each of the affected states have been considered, however, the IRS has warned that “despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.” In short, we don’t see these efforts going anywhere.
The SALT limitation disproportionately impacts married couples, particularly those who file jointly. This is because the cap remains at $10,000 per return and not per individual. Those who are married filing separately, must split the allowed deduction between them at $5,000. Despite the financial encumbrance to couples, the TCJA does provide relief to families in the form of lower tax rates, increased standard deduction and expanded tax brackets, as well as a generous child tax credit for families with AGI up to $400,000. Everyone’s situation is different so it really depends on your numbers if you are a winner or not with all of these tax changes.
Given the SALT cap, we think these following 4 strategies can help you:
Strategy 1: Bunching works! If you cannot take the full SALT deduction, consider bunching (the method that lumps together two years of charitable, medical or other deductions into one single year). You can take the standard deduction one year and itemize the following year, to make up for the lost itemized deductions. This is one of the best ways to maximize your deductions if you are on the border of claiming the standard deduction but still have additional itemized deductions that you would like to claim.
Strategy 2: Consider opening a donor advised fund (DAF) to help you make multiple years’ worth of charitable gifts in one year, while distributing the gifts at a later time. By doing so, you will receive an immediate tax deduction when you fund the account, despite the gifts being allocated to the charities at a later date.
Strategy 3: Qualified charitable distributions (QCDs) are a great option for those age 70 ½ and over. If you own an IRA (or are a beneficiary) over age 70 1/2, a QCD up to $100,000 could be another beneficial way to offset the loss of SALT deductions and to reduce your taxable income.
Strategy 4: Relocating or downsizing may work for some residents who are concerned about the financial toll that the SALT cap creates. This option must be genuine as auditors will go to great lengths to disprove false claims of a new resident state.
Although the new SALT cap is burdensome, through strategic financial planning, bunching of deductions, and creative charitable giving, some of the damage can be alleviated. Contact us to discuss what solutions will work best for your situation.
This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.