State and Local Tax Deduction: How Does the $10,000 SALT Deduction Work?Tax Deductions and Credits
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The SALT deduction isn’t based upon the amount of salt you buy
It stands for the State and Local Tax Deduction, and it can reduce your tax bill.
But not everyone can claim the SALT deduction.
If you claim the standard deduction, you can’t take the SALT deduction.
But for those who itemize deductions, we’ll walk you through the details of the SALT deduction.
SALT Deduction Overview
What Is the State and Local Tax Deduction?
You can deduct the taxes you pay to your state and local government on your federal income tax return.
What Types of State and Local Taxes Are Deductible?
There are four different state and local taxes you can deduct.
Taxes you paid to your state or local government on your wages are deductible.
For example, if you live in Philadelphia you can deduct the income tax you pay to Pennsylvania and the income tax you pay to Philly.
The amount of tax you paid will be shown in boxes 17 and 19 on your W-2.
You can only deduct sales taxes if you don’t deduct income taxes. You can’t deduct both.
All the sales tax you pay in a year can be deducted. This is beneficial if you made large ticket purchases, like buying a car or an RV.
Real Estate Taxes
Owning a residence comes with certain tax breaks, including deducting the real estate taxes you pay to your state and local government.
You should receive a tax assessment from your state or local government each year. Use this to calculate your deduction.
Personal Property Taxes
Personal property is anything you own that’s movable.
And the taxes you pay for owning this property are deductible.
This includes things like your annual vehicle registration fee.
To be deductible, these taxes must be paid annually as opposed to one-time taxes like sales tax.
Is There a Limit on the Amount of Tax I Can Deduct?
Yes. For 2019 and 2020, the maximum you can deduct is $10,000 a year. But if you’re married filing separately, the maximum is $5,000.
How Can I Claim the State and Local Tax Deduction?
The state and local tax deduction is claimed on lines 5-7 on Schedule A when you file your Form 1040.
Using Schedule A is commonly referred to as “itemizing deductions”. If you don’t itemize and instead claim the standard deduction, which is $12,200 for 2019 and $12,400 for 2020, you can’t claim any of the state and local tax deductions.
Deducting Income Tax vs. Sales Tax
You can deduct either your income tax or your sales tax. Not both.
Generally, most people will pay more in income tax than they do in sales tax. But if you made expensive purchases in a year, you may have paid more in sales tax. Do the math and figure out which deduction is best for you.
Calculating the Income Tax Deduction
To calculate your income tax deduction, look at the bottom of your W-2.
Box 17 lists the amount of state income tax withheld from your pay.
Box 19 lists any local income tax withheld.
Add these two numbers to any state and local tax amounts you paid directly to the government during the calendar year — that is, not through tax withholding — and that’s your income tax deduction
Calculating the Sales Tax Deduction
However, if you live in a state like Texas or Florida that doesn’t collect a state income tax, you’ll want to deduct your sales tax.
Calculating the sales tax you paid can involve a bit more work.
Keep copies of invoices or receipts from purchases made in a year.
Although every dollar of sales tax you paid at the grocery store, the home improvement store, or a restaurant is deductible, it likely isn’t practical to track it.
But if you bought a car, jewelry, or other large ticket items, hang on to those receipts.
Add up all the sales tax you paid to get your sales tax deduction.
If you don’t want to track receipts in this way, use the IRS Sales Tax Deduction Calculator.
State Tax Refund Addback
What if You Received a Refund of State Income Tax?
If you received a refund of state income tax, you should receive a Form 1099-G from your state. It will show the amount of the refund in Box 2.
Whether or not you must claim this refund as income depends on whether you claimed the income tax deduction for the year of the refund.
Determining the Taxability of Your State Tax Refund
If you claimed the standard deduction for the year in question, you won’t have to report the refund as income. But if you claimed the state income tax deduction for that year, you’ll have to report the refund as income.
For example, let’s say you claimed a $1,000 state income tax deduction on your 2019 tax return — and this deduction truly benefited you, even after taking into account AMT — but you received a $250 refund in 2020.
You will report the $250 refund as income on your 2020 tax return.
Spouses and the State and Local Tax Deduction
Spouses Filing Separately
For spouses that file separate tax returns, the SALT deduction is limited to $5,000 per person.
Community Property Considerations
If you live in a state that recognizes community property ownership, determine which spouse has legal ownership of the property in question.
However, if the property is community owned (meaning each spouse owns equal parts), as it likely is if it was obtained after marriage, then the tax deduction will be split 50/50.
Alternative Minimum Tax (AMT) and the SALT Deduction
What is the Alternative Minimum Tax?
The alternative minimum tax is used by certain individuals to ensure they pay at least a minimum amount of tax.
Who is Subject to the Alternative Minimum Tax?
Individuals subject to the AMT are usually higher-income earners who claim certain deductions. These deductions significantly reduce the amount of tax owed.
If you had any of the following items on your 2019 return, you’ll need to do another calculation on Form 6251 to see if you must pay the AMT:
- Taxes deductible on line 7 of Schedule A
- Investment interest expense
- Net operating loss deductions
- Interest from certain bonds
- Exercised stock option rights
- Estate and trust income
- Disposed of assets and recorded a gain or a loss
- Depreciation expense of certain assets
- Passive activity gains or losses
- Loss limitations
- Circulation costs
- Long-term contracts
- Mining costs
- Research and experiment costs
- Income from certain installment sales contracts
- Intangible drilling costs
Taxes Are Not Deductible for AMT Calculations
If you had any of the above items and you calculate AMT, the state and local taxes you deducted on Schedule A won’t be deductible for AMT purposes.
State and Local Tax Deduction Example
Jeff lives in Indianapolis and is a single filer. He owns a home and bought a new truck in 2019. Details about Jeff for 2019 are:
- Wages: $55,000
- State and local income taxes paid: $2,500
- Real estate taxes paid on home: $3,000
- Sales tax paid on new truck: $1,800
- Annual vehicle registration fee for new truck: $275
Jeff will be able to deduct $5,775 ($3,000 + $2,500 + $275) on Schedule A. Remember that he can deduct either state and local income taxes OR sales tax, not both.
SALT Deduction Frequently Asked Questions
- I prepaid my 2020 real estate taxes in December 2019. Can I deduct them on my 2019 tax return?
It depends on when you become legally liable to pay them, which is when the state assesses the property.
If your 2020 taxes were assessed in 2019, then you can deduct them in 2019. However, if they weren’t assessed in 2019, then you can’t deduct them.
Example: Your state assesses your property and sent you the tax bill in November 2019 for your 2020 taxes. You pay the bill in December 2019. You can deduct the 2020 taxes from your 2019 return.
Example: Your state assesses your property on January 1, 2020. You contacted your state on December 31, 2019 to find out what your 2020 tax bill would be and you paid the bill on the same day. In this case, you can’t deduct the 2020 taxes from your 2019 return since the taxes weren’t assessed until January 1, 2020.
- I own a rental property and paid $3,000 in real estate taxes on it. Can I deduct these taxes on Schedule A?
No. You will deduct this on line 16 of Schedule E. This is the form you use to report all income and expense from rental property.
- I own a second home in Mexico that isn’t a rental property. Can I deduct the real estate taxes I pay in Mexico?
No. Foreign real estate taxes are not deductible.
- Will the state and local tax deduction expire?
No. This deduction is not set to expire. However, Congress can change the tax laws at any time.
- I live in a high-tax state and my real estate taxes exceed $10,000 a year. What can I do?
Unfortunately, there isn’t anything you can do to deduct the excess tax. However, the $10,000 cap is scheduled to sunset after 2025 and the unlimited SALT deduction will return unless Congress changes the law before then.
- I pay my real estate taxes to my mortgage company via escrow. I don’t directly pay the taxing authority. Can I still deduct these taxes?
Yes. You are paying the taxes, although indirectly. Simply because your mortgage company pays the taxing authority on your behalf doesn’t change anything.
- I bought a home in April 2019 and had to prepay the April – December 2019 real estate taxes to my mortgage company. Do I deduct this entire amount on my 2019 return?
Yes, if the mortgage company paid the taxing authorities by December 31, 2019. Remember you can deduct only what was legally owed on and paid by December 31, 2019.
Don’t worry: if the mortgage company paid the taxes in 2020, you’ll be able to deduct the 2019 taxes on your 2020 return.
Melissa has nearly 20 years of experience as a CPA, having worked for both "Big 4" and smaller accounting firms.