OF SALT, TAXES & MORTGAGES…

OF SALT, TAXES AND MORTGAGES…

Do you pay State and Local Taxes (SALT)? If you live in any of New York, California, New Jersey, Connecticut, or any other of the so-called high-tax states, you likely pay more than the national average in SALT.  Prior to 2018, you were allowed to itemize all of your SALT payments on your federal tax returns.  However, the recently passed law, the Tax Cuts and Jobs Act, curbs the deductibility and otherwise affects you disproportionately, compared with the rest of the country.   The changes to the deduction of State and Local Taxes (SALT) on federal tax returns are generally as follows

SALT Deductions:

Prior to January 1, 2018, all taxpayers were allowed to deduct the full amounts of tax paid to their respective states and local government, for income taxes, property taxes and local taxes (including taxes paid on personal properties).   In other words, an individual taxpayer was allowed full deduction of all taxes paid to state and local governments.  The average New York taxpayer who took SALT deductions claimed a deduction of $22,169; New Jersey taxpayers claimed SALT deductions averaged $17,850 while California taxpayers who took SALT deductions averaged a claim for $18,438.

New Tax Law on SALT:

Under the new tax laws, SALT deductions are limited to an aggregate of $10,000 for joint filers.  Ergo, any SALT payments in excess of the $10,000 threshold become ineligible for deduction on federal tax returns.

MORTGAGE INTEREST DEDUCTION

Also, deduction for mortgage interest was truncated under the new law.  Previously, taxpayers could deduct mortgage interests on their primary homes up to interests paid on $1,000,000 (for joint filers) principal loan amount (plus $100,000 of home equity loans).  Under the new laws, interests on home equity loans are no longer deductible and new mortgage interests on primary homes deductible are limited to interest payable on up to $750,000 principal.

What can a taxpayer do, proactively?

Primary Home Mortgage – If tax deductibility was your primary reason for keeping your mortgage above $750,000, it reasons that you should not initiate mortgages beyond the $750,000 thresholds as anything in excess thereof becomes tax-deductibility inefficient.

Home Equity Loans – Our advice is to pay off this loan, if you have one.  Other than that you are no longer deriving tax deductibility from your home equity loans, you are unwittingly elevating the lender to a secured lender status, with your residence as collateral.  Defaults on such loans can quickly lead to disastrous foreclosure of your home.

 

STATES’ ACTIONS

Several states, especially New York, New Jersey and California, are debating a structure that will free up more of taxes paid to states more eligible for deduction on federal tax returns.  One of these measures will have taxpayers make payments to charitable organizations, and gives  the taxpayers  credits for the payments on their tax returns.  In such case, a taxpayer will pay up to the maximum allowable ($10,000) to the state directly, and the remainder to a charitable organization, with payments to charitable organizations still fully deductible under the new tax law.

An alternative being considered will have state taxes eliminated as payments from individuals but payable as payroll taxes by employers, which would be fully deductible to the employer.

Another yet measure being taken up by the state is a lawsuit filed by the states challenging the discriminatory effect of the new law on the high-tax states.

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