More middle income Americans will be hit with the change in limited SALT tax deductions on federal income tax returns than realize it. SALT – State and Local Taxes is a federal tax deduction that most Americans have always been able to take as long as they filed an itemized tax return. If you’re busy completing your 2017 tax return, you might not have given this much thought yet but the $10,000 deduction limit on your federal return is already adding up in the 2018 tax year.
According to the Tax Foundation, this change will hit hardest in the six states where SALT deductions are highest as a percentage of income: New York, New Jersey, Connecticut, California, Maryland, and Oregon. However, many people probably aren’t yet aware this comes with a marriage tax penalty. The new cap affects many married couples more than singles, as the $10,000 limit is per return and not per person. Married couples filing separately will be limited to a $5,000 deduction each. The only way to get around the marriage penalty is by divorcing.
Some states are already looking for loophole workarounds. One gaining some traction is converting some state taxes into charitable contributions to the state treasury. The charitable contribution could be deductible at the federal level (as long as it doesn’t exceeds 60% of your AGI). This will take some creative tax code writing by state legislatures to make the “charitable” contribution mandatory or paying an equivalent state tax mandatory. Of course, taxpayers and accountants will immediately begin testing loopholes.
Another change being considered at the state level is converting state income tax into an employer collected payroll tax. Again, this could be deductible by individuals on federal tax returns. But don’t plan on these saving your SALT deduction. No one can be sure these state tactics will be legally viable until new state tax laws are written and the feds challenge these in court. Nor can you depend on when or if these potential changes could take affect. A better individual strategy might being looking for ways to lower SALT beginning with property taxes.
Some people tried to postpone this new tax pain by prepaying 2018 property taxes in 2017. The IRS quickly cut off that loophole with a formal announcement that the deduction for their 2018 property taxes may only be deductible if assessed and paid in 2017.
It could be worth the effort and money to try lowering your property tax. But it will take time and money on your part. Before you do anything else, figure out if you are likely to be affected by the $10,000 limit on SALT deductions. This includes estimating other state and local taxes that will be added to your property tax and applied towards the $10,000 limit.
Next, you want to estimate your itemized deductions for 2018. The tax law change doubled the standard deduction to $12,000 for single filers and $24,000 for married filers. This could more than offset the new limit on SALT deductions.
Also consider that property taxes are on the rise across the country. A combination of home value appreciation (and tax assessments) and higher taxes are contributing to this. Americans paid $18.4 billion in property taxes during 2016. This is 4.6% more than in the previous year, according to the U.S. Census. This is a very local matter depending on value assessment and local property tax trends.
If you decide to go forward trying to lower your property taxes, keep in mind there are only two ways of accomplishing this. Either by lowering the tax rate or lowering your assessed value. Most individuals aren’t going to try taking on City Hall to lower the tax rate. That means your only realistic option is lowering your assessed value. It’s pretty universal that you have the right to appeal your home's assessed value.
If you decide to appeal the assessed value learn your local laws. In some places you can appeal at any time. In others you can only appeal once a year and other restrictions might apply. Begin preparing your appeal by comparing your property's value against similar properties in your area. If your home seems to be assessed at a higher amount than those comparable ones, documenting it will help you build your case. Tax rolls are public records – you can read your neighbors’ assessed values.
Almost universally, the assessment is limited to what can be observed outside of the home. The biggest factor is square footage. Improvements (or disrepair) inside the house don’t apply. But consider that some tax assessors are using drones to photograph and document unpermitted sheds and outbuildings in backyards.
Hiring an independent appraiser is also helpful. This is where it begins costing you money in addition to your time. An appraisal will cost several hundred dollars. Remember to document everything including photos of your exterior and of the houses you use as comparables. Your early research should make you familiar with the exact process to file your appeal.
Finally, some homeowners, such as seniors and veterans, may be able to take advantage of waivers or property tax relief programs offered by their municipalities or states.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.