Mitigating Federal Limitations on SALT Deductions: New State Laws and Tax Planning Techniques for Taxpayers

Description

State tax laws have been proposed or enacted in response to the new state and local tax deduction limitations imposed by tax reform. Some states have provided items within their tax laws allowing benefits and savings while others place additional burdens on taxpayers.

New federal tax law limits the itemized deduction for SALT for federal income tax purposes to $10,000, forcing states to consider alternatives for taxpayers aimed at circumventing the limits. States have explored options such as reducing state income taxes while making up that revenue with state-imposed employer payroll taxes or giving additional income tax credits or deductions to taxpayers. New laws passed in Connecticut and New York, and those proposed in California and other states, have set the tone and may benefit taxpayers by helping to mitigate the impact of the federal law limitations.

Connecticut Public Act No. 18-49 imposes a tax on pass-through entities which are then able to offset such tax with a personal income tax credit on the pro rata share of taxes paid by owners of the pass-through entity. This tax on pass-through entities is not subject to the new federal SALT deduction rules but provides the owners with an effective deduction against federal income tax without additional state income taxes.

New York enacted an employer-level payroll tax. This payroll tax is optional and allows employers to take a credit for wages paid more than $40,000 to employees, against their state personal income tax liability. The use of tax credits to offset personal income is also the foundation of California’s proposed bills.

In Notice 2018-54, the IRS intends to propose regulations to disallow the use of these state-level workarounds. Tax professionals and advisers must remain knowledgeable of enacted and proposed state tax laws to mitigate the impact of the federal SALT deductibility rules.

Listen as our panel provides detailed analysis of the federal SALT deduction limitations, newly enacted state tax laws, and planning strategies to limit or offset SALT liability post-tax reform.