🧂State and Local Taxes (SALT) got you salty?

☕Good morning! 

Paying taxes once is already a headache, so why pay twice on the same income? 

The federal State and Local Taxes (SALT) deduction can help you dodge this double whammy. 

SALT covers a wide range of expenses, and paired with a bunch of other deductions to itemize, the SALT deduction could make a meaningful difference in how much money is left in your pocket after every tax year.

With the passing of the Tax Cuts and Jobs Act (TCJA) in 2017, high earners can only deduct up to $10,000 from their federal income, hamstringing folks living in high SALT states and particularly homeowners with hefty property tax bills. 

However, big changes are on the horizon with the end of the TCJA in 2026, making it all the more important to cozy up with SALT and strategically itemize your expenses.

Let’s get SALTy. 

🧂What are State and Local Taxes (SALT)

State and Local Taxes seem straightforward enough, but there's more than meets the eye. 

State income taxes are exactly what they sound like:  taxes on your earnings that the state where you live collects. They apply to both individuals and businesses.  If you’re on a W2, these come out of your paycheck. 

This income funds state services like education, healthcare, and public safety.

State sales taxes are also involved. Every time you buy something, a little extra is added to the price. This is the state’s way of taxing the sale of goods and services.

For example, if you’ve shopped on Amazon in different states, you may notice that the “sales tax” portion of your price changes according to the states of the shipping addresses. 

Property taxes on real estate and personal property, such as vehicles and equipment, are also included in the SALT deduction cap. 

Even though local governments usually collect them, they count as state taxes for federal reporting purposes.

The list doesn’t stop there: 

🍺Excise Taxes: Often called “sin taxes,” these apply to specific goods like gasoline, tobacco, and alcohol.

🕊️Estate and Inheritance Taxes: These taxes are imposed on transferring wealth after death and vary by state.

🏙️ Some cities and municipalities also impose local income taxes on top of state taxes. For instance, cities like New York and San Francisco have additional taxes that residents must pay.

The federal government offers a SALT deduction for those who itemize their deductions instead of taking the standard deduction. 

This SALT deduction was largely left uncapped before the Tax Cuts and Jobs Act (TCJA) of 2017, allowing high earners in high SALT areas to mitigate some of the brunt of geography-oriented taxation. 

❌ The 2017 Tax Cuts and Jobs Act (TCJA) capped the SALT deduction at $10,000.

The TCJA has had a mixed impact. 

On one hand, the TCJA nearly doubled the standard deduction, which increased to $12,000 for single filers and $24,000 for married couples filing jointly in 2018. 

For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. 

While the standard deduction was favorable to people in low to moderate SALT areas, the $10,000 cap on SALT deductions significantly affected taxpayers in high-tax states like New York, California, and New Jersey, where state and local taxes often exceed this limit. 

🏙️ Say Sam owns a condo in Manhattan assessed at $1 million and earns an annual income of $500,000. 

1. Property Taxes: New York City property tax rates vary depending on the property type. Let’s assume the effective property tax rate for condos is approximately 1.05%, meaning your property taxes are $10,500 annually.

2. State and Local Income Taxes: New York State income tax rates range from 4% to 10.9%, and New York City income tax rates range from 3.078% to 3.876%. Let's assume a combined rate of around 13% for a high earner, leading to state and local income tax of $65,000. 

3. Sales Taxes: New York City has a combined state and local sales tax rate of 8.875%. The exact amount depends on your spending habits. Let's estimate annual taxable spending at $50,000, leading to about $4,437.50 paid cumulatively.

In total, Sam pays  $79,937.50 in SALT taxes, in addition to his federal income tax, minus any applicable deductions and credits. 

Under the new TCJA rules, Sam could only claim up to $10,000 of his nearly $80,000 in SALT. Even with the lower marginal tax rate, the TCJA hurt Sam more than it helped in this narrow example. 

This, among other reasons, has forced high-earners and companies to leave high-SALT areas (e.g., New York, California, Illinois) for low-SALT areas (Texas, Florida) in large numbers. 

✅Mark your calendars: The TCJA will sunset on January 1, 2026

The savviest folks know it’s not about the rules of the game; it’s how you play them. 

If the TCJA isn’t renewed or replaced, high earners will see a shift in how they can offset their income with SALT deductions. 

Assuming nothing else changes, here’s what’ll happen when the TCJA sunsets:

💸 Marginal Tax Rates Increase. The current reduced rates will revert to pre-TCJA levels, meaning more of your income could be taxed at higher rates.

📉 Standard Deductions Decrease. The generous standard deduction will be cut in half to pre–TCJA levels but adjusted for inflation. 

🗺️ Full SALT Deduction Restored. The $10,000 cap on SALT deductions will be lifted, which will be huge for those in high SALT areas (especially homeowners), who can now fully deduct their state and local taxes.

🏡 Mortgage Interest Deduction Increases. The cap on the mortgage interest deduction will increase from loans up to $750,000 to pre-TCJA levels of $1 million for home mortgage debt and $100,000 for home equity loans.

🧂 Making Cents of State and Local Taxes & Deductions

SALT is one of the many unique levers in the tax game that can help you exert meaningful control over your finances that we take for granted.

For many folks taking a high-paying job in a high SALT area like New York City or San Francisco, SALT seems like an unavoidable dark cloud over what would otherwise be sunny paydays. 

Unless you can go remote and work in a low SALT area, you can’t dodge state and local taxes, but you can still make a meaningful difference in your tax situation with some strategic planning and foresight. 

The sunset of the TCJA is a game-changer and should nudge anyone looking to save money on their taxes to examine their itemizable expenses more closely. This is especially true since the standard deduction will likely be half what it is in about 18 months. 

First, sit down and review your expenses line by line and calculate your itemized deductions compared to the standard deduction. This can be an exceptionally rewarding exercise with a financial planner with explicit experience working with high earners to reduce their tax bill. 

By planning now, you can turn these upcoming tax changes into opportunities, ensuring you keep more of your hard-earned money where it belongs—working for you.

Until next week! 

Dan from Tailored Cents

P.S. Follow me on LinkedIn for more tax gems to save you money.