Although it cannot be used as a deduction for the Alternative Minimum Tax, SALT does affect your regular income tax which in turns affects how many stock options you can exercise
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Quick Summary
- The State and Local Tax (SALT) deduction is primarily made up of your property tax, but also includes either state income tax or state/local sales tax
- The deduction was lowered to a maximum of $10,000 due to the Tax Cuts and Jobs Act of 2017, severely limiting the amount you can deduct
- If you take the SALT deduction you also choose to itemize your deduction as opposed to taking the standard deduction
- The SALT deduction is not an eligible deduction for AMT purposes!
What is the SALT?
Simply put, the State and Local Tax deduction allows you, if you choose to itemize, deduct taxes paid on your property, state income, or state sales tax. The details of this deduction don’t really change from state to state, but what does change is the underlying pieces you include. For example, if you live in Florida, where there is no State Income tax, you wouldn’t be able to deduct any of the income tax. If you live in California, where certain areas have higher local property tax rates, this means you might be able to deduct more than you would if you lived elsewhere.
| Filing Status | SALT Deduction Limit |
|---|---|
| Single | $10,000 |
| Married, Filing Separately | $5,000 |
| Married, Filing Jointly | $10,000 |
Yes, the SALT deduction is one of the few things that is better for you when you are not Married, as the cap per couple is the same as if you were single
Property Tax
For most folks, if you own a home and pay a mortgage, it is almost a no brainer to choose to itemize your deduction instead of taking the standard deduction. This is because you not only can deduct your mortgage interest paid but also the property tax as part of this SALT deduction. And a good portion of the time, those two items alone add up to more than the standard deduction.
If you co-own a property with someone else, the same rule applies as it does for mortgage interest paid. The IRS asks that you deduct only the portion of the property tax paid that you were responsible for. In other words, if you split a home 50/50 with someone, but the other person paid all the property tax for a given year, only that person is eligible to include the tax paid as part of his/her deduction. Keep this in mind when ‘paying’ for property taxes if you fall in this situation. A good tip is to either pay from a joint account or simply remember to split the bill when the time comes.
State and Local Income/Sales Tax
In regards to state/local income tax or state/local sales tax, you need to choose which one you decide to include because you can only include one. The vast majority of time, your state income tax is much higher.
Income Tax
The state and local income tax is exactly what you think it is - the amount of tax withheld from your paychecks throught the year for state and local taxes. Depending on where you live, you might not have a local income tax (i.e. a county income tax) so it may just be your state withholdings.
Sales Tax
For sales tax, that is a little harder to calculate. Obviously you are not going to remember every piece of sales tax you paid throughout the year. Luckily, the IRS has a calculator to give you the estimate you should write down for this line item, if you choose to deduct the sales tax. For the most part, you probably would only choose to deduct the sales tax if you made a big ticket purchase for the year you are filing for (i.e a car, boat, etc). Those specific line items add up quickly, and when adding that on top of the IRS calculator’s sales tax estimate, this number may the state/local tax withholdings from your paychecks.