Even though a 2017 study of Russian cosmonauts concluded that everything we thought we knew about salt might be completely wrong, the House and Senate are poised to pass tax legislation taking away our daily dose of SALT. While salt (NACL or Sodium Chloride) is completely different from SALT (state and local taxes), I love them both and don’t want anyone other than my internist to limit my intake. Neither the cosmonauts nor my internist have denounced science as of yet, so both opinions are still highly valued.
Now that the House of Representatives has passed their version of “tax reform” the extinction of the state and local tax deduction seems closer to reality. As passed, the House Bill completely eliminates any deduction for state and local income taxes, but still allows property tax deductions up to $10,000. The Senate version, still working its way to a vote, goes even further by eliminating the $10,000 window for property tax deductions.
No doubt that many taxpayers in high tax states would be affected by higher federal tax bills on a going forward basis. What has not garnered the attention of the media however is the indirect impact elimination of the deduction could have on prior tax years. Any tax practitioner worth his salt (bad pun intended) knows that when you inform your client of any additional state and local taxes they may owe for past years (for example, as the result of an audit), the first thing we tell them is about any federal benefit they might receive.
A very simple example: Ms. A is audited by New York State for the tax 2014 through 2015. An additional $100,000 of New York State personal income tax is assessed. Ms. A is rightfully upset with her accountant, but he softens the blow by reminding her that she is in the highest federal tax bracket and will likely get an almost 40% federal tax benefit for the additional state taxes. The end result being that the audit costs her only an additional $60,000 in tax. Her accountant is really on the ball and tells her not to pay the assessment in 2016 (since she might be in the AMT), but to wait until 2017, where he is almost certain she will still get the federal tax benefit.
So as to settling state tax audits at the benefit of the feds, the party might be over if the Senate passes their Bill and the full Congress can find a way to reconcile the vastly different pieces of legislation. The party is just beginning though for State tax practitioners as planning for state and local taxes becomes even more important than ever. See you all at the party. First round is on me.
This is an ongoing issue, so if you have questions, contact me at email@example.com or your Berdon advisor.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.