Beginning in 2018, deductions for state and local sales, income and property taxes remain deductible, but are limited as a result of the Tax Cuts and Jobs Act. The amount that you can deduct for all state and local sales, income and property taxes may not exceed $10,000 ($5,000 for married taxpayers filing a separate return).

Tax Planning Consideration

Doeren Mayhew’s tax advisors encourage individuals to consider the following due to the changes for this deduction:

  • Families in states with higher state income taxes and real property taxes may be impacted more than families in states with lower taxes due to loss of deduction amounts. Effects of the change will vary depending on the size of the family, income level and the standard deduction allowed to be taken under the plan’s revised individual income brackets. Some lower- and middle-income taxpayers could see this as a wash if the doubling of the standard deduction offsets the elimination of the personal exemption and itemized deductions.
  • Married couples get less of a benefit with the new state and local sales, income and property taxes deduction since the limit is the same for both single and married filers. For example, two unmarried taxpayers both paying $10,000 in state and local sales, income and property taxes would get an aggregate $20,000 deduction when they file, whereas if they get married they suddenly lose $10,000 in deductions.
  • Congress specifically prohibited pre-payments for income tax to be used as state and local tax deductions for the current year. Amounts paid in 2017 for 2018 state or local income taxes will be treated as paid in 2018.
  • Taxpayers had the ability to prepay property tax in 2017 for 2018, unlike restrictions put on state and local sales, income and property taxes tax by Congress. The Internal Revenue Service (IRS) in response to a number of questions from the tax community concerning the deductibility of prepaid real property taxes has issued some official guidance. The IRS declared whether the deduction is allowed “depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018.” Thus, a prepayment on its own isn’t enough, taxes must be assessed in order to claim the deduction for the prepayment.

To find out how the changes to the state, local and property tax deduction may impact your tax liability, please contact Doeren Mayhew’s tax advisors today.

Want to reach the author? Email Michael Weller or contact him at 248.244.3039. Michael Weller, JD is a Senior Tax Manager with Doeren Mayhew.