Don’t worry, they’re not doing a cooking podcast. In this episode, Tax Directors Candace Varner and Ben Hake discuss a different kind of SALT – State and Local Tax. The SALT deduction was capped at $10,000 in 2018, and many high-tax states have since introduced their own workarounds. Recently, the Build Back Better Act proposed a significant increase to the deduction, but taxpayers who can’t take advantage of it this year may be left feeling salty.
Wishing happy holidays (including Festivus) to all our listeners!
Hear more about the Build Back Better Act tax proposals: https://creativeplanning.com/education/podcast/tax-legislation-proposal-changes-life-comes-at-you-fast/
Read more about the California SALT workaround: https://creativeplanning.com/education/article/california-latest-state-to-add-state-tax-workaround/
Learn more about Festivus: https://youtu.be/HX55AzGku5Y?t=34
The Standard Deduction podcast is hosted by Tax Directors Candace Varner and Ben Hake. This podcast is a thoughtful, informed discussion about ideas, trends and developments in taxes related to personal wealth management.
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Candace Varner: Hello, and welcome to The Standard Deduction. I’m Candace Varner.
Ben Hake: And I’m Ben Hake.
Candace: And today we want to talk to you about state and local taxes, also known as SALT.
Ben: I think we can almost say we’re going to add a pinch of “SALT” to the holiday season.
Candace: Wow. We could, Ben. There’s so many good puns with this particular topic. It was really designed for us specifically and our style of talking. Okay. So the SALT deduction, you’re hearing it in the news a lot right now. That’s what I’m getting asked about it all the time. So remember SALT is state and local tax. It’s currently part of the proposals in the Build Back Better Act, that some of this might be changing. And so that’s why you’re seeing it in the news a lot. State and local tax includes a group — all different types of taxes that are paid to a state or local government. So a lot of people consider this, you’ll think of the state income tax. That’s probably one of the biggest ones that you’re paying, but it also includes real estate taxes that are paid, personal property taxes (usually on cars and boats), sales taxes on large purchases, but also the income tax. So anything that’s basically not the check is payable to the IRS, but other taxes you’re paying, that all falls into this lovely group of SALT taxes.
Ben: And part of the reason this is coming up is because as part of the tax reform that took place in 2018 is that deduction is now being capped at $10,000; and a lot of the media, and when the news covers this, they kind of describe it as a coastal issue. So they always bring up New York, New Jersey, California, places that have really high income taxes. But we also hear about it from a lot of our clients who live in states with no income tax at all. So we’ve got clients down in Texas who have extremely high real estate tax bills, and this is something that’s impacted them, even though, again, they’re not what most people think of when they think of the states with high SALT rates.
Candace: Right. So even though the income tax piece is a big part of it, there’s a lot of things that go into this category. But for the state income tax piece specifically, it’s really only a federal tax issue because the income tax paid to states is not deductible on your state return. That would make it circular and even worse for us wonderful CPAs. So because it’s only a federal tax deduction, the states have had a lot of incentive to try to find a workaround since this law changed with the Tax Cuts and Jobs Act that was effective in 2018. And since then, a lot of the states that have high taxes have been trying to find a way to work around this and help people continue to benefit from the deduction at the federal level while working with this $10,000 cap. So Ben, how have they done that?
Ben: So, the real groundbreaking pioneer in this space is the state of Connecticut. And they came up with a strategy where instead of charging — and this is always going to apply to flow-through entities. So if you’ve got a corporation, like you work for Amazon or Microsoft, that wouldn’t work here. But if you have a flow-through or a small business, what ends up happening is instead of charging your state level tax — let’s say you would owe $10,000 on $100,000 — instead of charging that on your individual return, they’re going to charge your business for that. And so now we’re deducting that outside of that SALT limit. But most people are like, “Well, I don’t want to pay $10,000 at the entity and $10,000 at my individual return. I’m getting double taxed.” So the states say, “Hey, we’re going to give you a credit.”
Now, Connecticut’s is a percentage of what you pay in, but a lot of these states are making it dollar for dollar. So if you pay $10,000 at the entity level, you’ll get a credit at $10,000 on your individual return. So Connecticut does that and everyone – it’s a little bit of a waiting game. The IRS hadn’t at the time announced if they’d left that fly, if they were going to try and fight that in court. And so, in late 2020, they introduced a revenue ruling that basically said, “Hey, we’re going to acquiesce, we’re not going to fight it. Do it if you’d like.” And the oth