The limit of $10,000 on the State and Local Tax (SALT) deduction was still a financial fact for high-income consumers in such states as California, New York, New Jersey, and Illinois. When it used to be a good federal tax break on high property and income taxes, it now seems like a cave door. Nevertheless, the proactive taxpayers are not equipped with the keys.
To overcome this frustrating experience, it is important to venture into the complex legal measures that can help reduce this load and restore part of that lost value. This guide covers two potent but complicated maneuvers, which include the Pass-Through Entity Tax election and strategic payment timing. Whenever you are facing trouble, try to look for a tax expert (like a California sales tax attorney) for help.
Learn about the Challenges We Are Going to Face
It is important to put the problem in the right perspective before getting into solutions. The SALT cap restricts your federal itemized deduction on a mixture of state income tax (or sales tax) and local property tax up to 10,000 dollars (5,000 dollars in the situation where the husband and wife are married and filing separately).
Even in a big metro area, a family with two incomes can pay more in property taxes than this amount, and their large payments to state income taxes will not be deductible on their federal filing. The purpose of such sophisticated plans is either to convert these non-deductible personal payments into deductible business expenses or to maximize the timing of such an expense.
Find out the Advanced Strategies
Pass-Through Entity Tax Election
It is now the best strategy that is influencing business owners. In case you are an S-Corporation, partnership, or LLC (that files as either), you can enjoy the PTE tax regime of your state.
How Does It Work?
Rather than income being directed to you (where it is then taxable at the individual state level), the entity itself is taxable at the state income tax level.
The business is taxed under state tax as a deductible expense on the entity’s federal filing, which lowers the taxable income.
As the owner, you are then allowed a credit on your personal state tax account for the portion of the business that pays in taxes, and in many cases, avoids a second taxation.
Considerations and Tips
- Different Rules by State
This is not universal, and there are vast differences in the rules. More than 30 states have either implemented some form of PTE tax. You have to examine your particular state’s laws, election processes, and dates, and they may be annual and final.
- The Workaround Nature
These were the laws that were introduced as a workaround to the SALT cap. The IRS has accepted the mechanism, hence it is a compliant strategy.
- Strategic Timing Is Important
In the case of W-2 employees and those who do not have a pass-through business, direct options are fewer and can still be optimized, which is mostly by itemizing in alternating years.
Timing Concept
The SALT cap aims to aggregate deductible payments to a single tax year in order to surpass the standard deduction, but reduce them in the other tax year, since the cap poses a substantial obstacle to itemizing.
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Implementing Methods
- State Taxes
In the case of those who pay quarterly estimated taxes, you are allowed to decide when to pay the fourth quarter (January 15). When it is paid in December rather than January, the deduction is changed. Hiring an experienced tax professional (like an IRS tax lawyer in San Diego) would surely get you some major advantages.
- Important Caveat
Take care of the Alternative Minimum Tax (AMT). With AMT, state and local taxes are not deductible to some taxpayers, and this may offset the benefit of bunching. This has to be calculated meticulously.
The SALT cap can be a major obstacle, but it is not a wall that cannot be gone through. To the ready taxpayer who has access to professional advice, these sophisticated plans will allow them to save something meaningful, making a source of pain an avenue to intelligent financial planning.
