As a full service accounting firm, we are preparing our clients for what lies ahead in their 2018 tax filings. Here are some issues to be aware of, including what led us here and where these changes may take us in the future.
For taxpayers who itemized their deductions in the past, they used to be able to deduct all state and local income taxes and property taxes, called the SALT deduction. For most taxpayers, this was a dollar-for-dollar reduction of adjusted gross income. These taxes are shown as state and local income tax withholdings itemized on paystubs and W-2, as well as state extension/estimated income tax payments.
Starting with the 2018 tax year (this year), the SALT deduction is limited to $10,000. It is an itemized deduction.
For the standard deduction, however, the Tax Cuts and Jobs Act nearly doubled the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for married couples filing joint returns.
Its Immediate Impact
With the elimination of other itemized deductions, only about 5 percent of taxpayers are expected to itemize deductions starting this year.
Taxpayers in high income states like New Jersey, New York, and California are more likely to be negatively impacted by this SALT deduction limit.
What Could Happen Next
States are creating ways for their residents to still deduct payments that were typically for real estate taxes.
New York and New Jersey will now allow residents to convert property taxes into charitable contributions to local governments. Charitable contributions are still fully deductible from federal income taxes.
New Jersey is scheduled to increase the income tax deduction for property taxes from $10,000 to $15,000 for residents.
New York is working to establish a system that allows taxpayers to convert state income tax to a payroll tax, which companies would pay on their behalf and then deduct from their own federal tax bill.
While the IRS has issued notices to states trying to get around the $10,000 limit, New York, New Jersey, Connecticut, and Maryland have all joined in a lawsuit arguing the $10,000 limit is unconstitutional.
The new SALT deduction and other individual tax changes are temporary starting this year. They are scheduled to expire after 2025.
Since the enactment of the new law, we have been reaching out to our business clients so that we can prepare for these critical changes and explore ways to maximize allowable deductions.
If you are concerned about how these sizable changes are going to affect you, call us today at 856-288-7400 or email us: email@example.com to set up an individual appointment and discuss your particular concerns.