Tax Reform: State & Local Tax Deduction Changes
Under the new tax reform which was signed into law on December 22, 2017, the itemized deduction for state and local taxes will be limited to $10,000 in 2018 going forward. In 2017 and earlier, taxpayers were allowed to deduct Real Estate Taxes, Personal Property Taxes, and the higher of their sales tax paid or their state and local income taxes paid, with no limit. This cap, along with other changes to itemized deductions, will lower the amount of taxpayers eligible to claim itemized deductions. The limit on the deduction will have a greater effect on taxpayers in states with higher income tax rates, as well as those individuals who pay a significant amount in state and local taxes or have large real estate taxes.
Real Estate & Personal Property Taxes paid for the purpose of trade or business will still be fully deductible.
TAX PLANNING OPPORTUNITY
From a planning perspective, individual taxpayers that are not expected to be in an Alternative Minimum Tax (AMT) position, should prepay their projected 2017 state and local tax income liabilities and assessed real estate taxes before the end of the year. If they do this, they will receive a greater tax benefit before state and local taxes are capped in 2018, and the additional taxes paid cannot be utilized. Because state and local taxes are disallowed for AMT, taxpayers subject to AMT may not receive a benefit for paying these taxes in 2017.