The Tax Cuts and Jobs Act of 2017 brought significant changes to the US tax code, including a cap on state and local tax (SALT) deductions. This cap, also known as the SALT deduction limitation, has left many taxpayers looking for ways to reduce their tax bills.
So, how can SALT reduce your tax bill this year?
What is the SALT Deduction Cap?
The SALT deduction cap refers to the limitation on the amount of state and local taxes that can be deducted from federal income tax. Prior to the 2017 Tax Cuts and Jobs Act, taxpayers could deduct the full amount of their state and local income, sales, and property taxes from their federal tax bill. However, the new law introduced a $10,000 cap on these deductions, a significant impact for taxpayers in states with high taxes.
Taxpayers are now paying more in federal income tax than they ever did before. Understanding the SALT deduction cap and how it works can help taxpayers navigate their tax bills more effectively.
Strategies for Navigating the SALT Deduction Cap:
Navigating the cap on SALT deductions requires careful planning and consideration of your financial situation. Here are five strategies to help you cut your tax bill:
Increase your itemized deductions by bundling expenses together. This means you can make multiple years worth of charitable donations in a single year, prepay your property taxes for the upcoming year, or bundle other deductible expenses in the same tax year. This can help you exceed the SALT deduction cap and maximize your tax savings.
Utilizing Charitable Donations:
Charitable donations reduce your tax liability while supporting a good cause. Consider donating appreciated assets such as stocks, mutual funds, or real estate. This avoids capital gains taxes and increases your itemized deductions.
To learn more about charitable gifting strategies, check out our blog, here.
Paying State and Local Taxes Early:
If you owe state or local taxes in the upcoming year, consider paying them early. By prepaying, you can increase your SALT deduction for the current tax year.
Contributing to Retirement Accounts:
Lower your tax bill by contributing to a retirement account such as a 401(k) or IRA. These contributions are tax-deductible and can help reduce your taxable income.
Taking Advantage of Business Deductions:
For business owners, there are several deductions that can reduce tax liability. Some examples include deducting expenses related to your home office, business travel, or equipment purchases.
There are also more specific deductions available to business owners:
Section 199A Deduction
Business owners can deduct up to 20% of their qualified business income, which can result in savings of tens or even hundreds of thousands of dollars. Working with a firm that specializes in tax planning ensures that business owners are aware of all available tax planning opportunities. Tax planning firms also provide project management services to help keep track of necessary tasks and deadlines.
Qualified Business Income (QBI) Deduction
A Qualified Business Income (QBI) deduction allows partners of certain types of businesses, including partnerships, S corporations, and sole proprietorships, to deduct up to 20% of their qualified business income on their personal tax returns.
For instance, if the business generates $4 million in profit and an individual holds a 25% ownership stake, they may have a qualified net income of $1 million.
It is important to note that the mandatory tax rate subscribed to by the business entity is 9.3%, and the business entity is responsible for paying taxes on behalf of the partners, who must individually opt-in to accept this treatment.
The entity also has to pay a tax of $93,000 for one partner, which is deductible at the entity level. The the partner can use this tax to reduce their total income. If an individual is in a 37% bracket, they could potentially save close to $34,000 through this method.
The QBI deduction is subject to income limits. Married couples with joint income above $329,800 or individuals making above $164,900.. Additionally, the deduction may be limited or reduced based on the type of business, the amount of W-2 wages paid by the business, and the value of the business's assets.
AB 150 Small Business Relief Act
The AB 150 Small Business Relief Act in California is another strategy that businesses can use to navigate the SALT deduction cap. By making a voluntary tax payment at the entity level, businesses can receive a credit on their personal tax returns.. This strategy is particularly beneficial for partnerships, S corps, and LLCs that generate significant profits.
However, there are strict timelines and requirements for participation in the program, including making an irrevocable election by June 15th of the tax year and a minimum payment of $1,000 or 50% of last year's tax liability (whichever is greater).
Connect With Centura
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