February 13, 2020

Four Strategies for Managing the SALT Deduction Cap

For those who live in states with high income tax rates like New York or New Jersey, you may have been impacted by the 2017 Tax Cuts and Jobs Act which limited the State and Local Tax (SALT) deduction to $10,000.

Following are four strategies that may help you alleviate the effects of the SALT deduction cap.

  1. Bunch your charitable donations:

With an expanded standard deduction, a couple who files jointly will now need more than $24,800 in itemized deductions for 2020 in order to use them.  Assuming the couple uses the maximum SALT deduction of $10,000, they will need at least another $14,800 of itemized deductions to take of advantage of them. One way to get there is by “bunching” charitable donations. For example, assume the couple plans on giving $10,000 to charity each year.  Rather than make annual $10,000 gifts, they can make $20,000 gifts every other year.  This strategy would enable the couple to take the itemized deductions in the year the gift is made and the standard deduction in the non-gift years.

  1. Maximize your state tax deductions:

With the full amount of your state tax bill no longer available as deduction, the impact of taking state income tax deductions is even greater, so it’s especially important to be aware of all the deductions that are available for your state of residency. For example, if you are a resident of New York, up to $10,000 of contributions to New York’s 529 plan is deductible for joint filers ($5,000 for single filers). Another common yet effective method to reduce both federal and state tax liability is to maximize your employer retirement plan’s contribution. Each taxpayer with access to a 401(k)/403(b) plan through work can contribute (and deduct from taxable income) up to $19,500 for tax year 2020. Taxpayers who are age 50 or older can make additional catch-up contributions of up to $6,500 in 2020 for a total of $26,000.

  1. Double-check your tax withholdings:

Especially when you work as a contractor, receive 1099 income, or have to submit estimated tax payments, it is a good idea to double check with your tax advisor to make sure that your estimated tax payments or withholdings are enough to cover a potentially higher federal tax bill. Underpaying estimated taxes (which are due on April 15th, 2020, June 15th, 2020, September 15th, 2020, and January 15th, 2021) can result in tax penalties, substantially adding to your total tax liability.

  1. Finally, keep in mind that it might not be as bad as it seems because:
    • The Alternative Minimum Tax (AMT) exemption and phase-out threshold increased. The AMT is a parallel tax system that requires tax filers to compute taxes twice – once under the ordinary schedule and once again under an alternative schedule that allows fewer deductions, and then pay whichever is higher. Large SALT deductions were one of the primary factors that pushed taxpayers into the AMT. The updates significantly reduced the number of people who are subject to AMT.
    • The individual marginal tax rates were reduced.  The highest rate was lowered from 39.6% to 37%.
    • The Qualified Business Income (QBI) deduction was created. The QBI deduction enables (with numerous limitations) owners of pass-through entities, such as sole proprietorships, LLCs and S-corporations to take a 20% deduction on their small business income.