You can deduct certain state and local taxes (SALT) if you choose to itemize deductions on your tax return rather than claiming the standard deduction. But if you are like nearly 90% of taxpayers, your standard deduction will be higher than your total itemized deductions and you will not claim the state and local tax deduction because it will not benefit you to itemize. If you happen to fall into the small group of taxpayers who do benefit from the state and local tax deduction, read on.
There are Three Categories of State and Local Taxes You Can Include in Your Deduction
There are three categories of state and local taxes you can include in your SALT deduction, and these are reported on line 5 of the Schedule A.* On line 5a you can claim either the amount of state and local income taxes you paid during the year, or you can claim a deduction for general sales taxes. You cannot claim both, but you can claim the one that results in the most benefit to you. The deduction for income taxes includes your state tax withholdings, any state income tax payments you made for prior years, and any estimated taxes you paid for the current year. If you are in a state that has no state income tax – or you choose to claim general sales taxes instead – you can deduct either your actual sales taxes paid or claim a set amount from the optional state sales tax table plus any sales tax you paid on specific large ticket items, such as motor vehicles, boats, and motor homes, purchased during the year. The IRS requires that you have all your receipts to claim your actual sales taxes.
State and local real estate taxes are also included in the SALT deduction, and line 5b is where you can claim them. The amount you are allowed to deduct includes only amounts assessed on the value of the property prior to the end of the tax year that you or your mortgage company actually paid during the year.
The third category of SALT taxes is state and local personal property taxes. Personal property taxes are annual taxes you pay on property based on the property’s value, and additional fees should not be included in the amount you claim. Vehicle registration fees are the most common personal property tax. Other deductible personal property taxes include annual registration fees on boats and RVs that are based on the value of the property. You can report your personal property taxes on Schedule A, line 5c.
As a side note, the SALT deduction falls in the category of “Taxes You Paid” on the Schedule A, and there is one more line in that section of the form. Line 6 of Schedule A is where you can report any taxes you paid to a foreign country and any generation skipping tax (GST) you might have paid. If you paid tax to a U.S. possession, you should report it on the appropriate line under state and local tax.
While the tax code does allow you to deduct certain state and local taxes, the number of taxpayers who file Schedule A and can benefit from it has fallen in recent years due to changes made by the Tax Cuts and Jobs Act (TCJA). The 2017 tax bill, which increased the standard deduction and placed a $10,000 cap on the amount of state and local income taxes that can be claimed, greatly reduced the number of taxpayers who can benefit from itemizing. Higher income taxpayers as well as taxpayers in high-tax states such as California, Illinois, New Jersey, and New York have been affected most by the TCJA’s SALT deduction cap.
*Line numbers on tax schedules vary from year to year. The references to Schedule A line numbers in this blog apply to tax years 2018-2020. If you are doing taxes for a year prior to 2018 or after 2020, please refer to the version of the Schedule A for that year.