SALT limitation in tax reform act

Many health professionals recommend limiting our salt intake but to tax professionals, SALT limits have a different meaning.  SALT refers to State and Local Taxes which have been deductible for many taxpayers in the past but are now limited to a maximum of 10,000 dollars under the new tax reform passed last December.  There are a large number of taxpayers who won’t be affected by this limitation but for high earners especially in high tax states such as California, this could amount to a significant change to their tax liability going forward.  However, many people with 6 figure incomes end up paying the AMT (Alternative Minimum Tax) and the new tax bill grants some relief from AMT.

So, what is AMT?  The minimum tax was originally enacted in 1969 and has evolved into what is now called the Alternative Minimum Tax.  Congress was concerned that there were some high income earners who were ending up paying absolutely no income tax because they were taking advantage of so many tax breaks that they were completely eliminating their tax liability.  The AMT is a parallel tax system that eliminates most deductions and credits available for income tax purposes and calculates the tax due under AMT rules.  Then you compare the amount due under both methods and pay the higher of the two amounts.  State and local income taxes are deductible in calculating income tax but not for AMT.

Let’s demonstrate with a couple of examples:

1. Married couple makes a little over 224,000 per year and pays roughly 12,000 in property taxes and 22,000 in state and local taxes.  For 2017 they ended up with a federal income tax liability of just over 30,000 dollars and an AMT of a little over 5,000 dollars for a total tax liability over 35,000.  For 2018 using these exact same figures the clients would owe slightly over 35,000 in income tax but no AMT.  In this case their tax liability dropped by 19 dollars.
2. Another couple made roughly 485,000 in 2017 and had a SALT deduction of just over 64,000.  For 2018, the SALT deduction is limited to only 10,000 but they also get significant relief from AMT.  Their total federal tax liability will increase by just under 400 dollars.

As the income level rises, the benefits of the AMT reduction tend to diminish so if your income is high enough, the SALT limitation could cause a significant increase in federal tax liability.  If you have concerns about how this new change will affect your individual situation you can contact us or a competent tax professional such as an Enrolled Agent in your local area.