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Tax Reform Series: Changes to State and Local Income Tax

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Contributed by: Matthew E. Chope, CFP® Matt Chope

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The Tax Cuts and Jobs Act (TCJA) is now officially law.

We at The Center have written a series of blogs addressing some of the most notable changes resulting from this new legislation. Our goal is to be a resource to help you understand these changes and interpret how they may affect your own financial and tax planning efforts.

The original proposals for tax reform would have completely eliminated any deductions for taxes paid to a state or local government, including local property taxes.

 “State And Local Tax” (SALT) provision varied, and controversially was projected to have a disproportionate impact on states with big cities with high state and local tax rates (like New York, California, and Maryland have some of the highest state income tax rates, and therefore the higher state income tax deductions).  Many people in these states are considering moving to lower taxed states due to this tax law change.

However, in the final version of the Tax Cuts and Jobs Act of 2017, households will be given the option to deduct their combined state and local property and income taxes, but only up to a cap of $10,000. Notably, it is a $10,000 limit on the combined total of property and income taxes, not $10,000 each! The $10,000 limit applies for both individuals and married couples (which is an indirect marriage penalty for high-income couples), and is reduced to $5,000 for those who are married filing separately.

In addition, to prevent households from attempting to maximize their state and local tax deductions in 2017 before the cap takes effect in 2018, the new rules explicitly stipulate that any 2018 state income taxes paid by the end of 2017 are not deductible in 2017 and instead will be treated as having been paid at the end of 2018. However, this restriction applies only to the prepayment of income taxes (not to property taxes), and applies only to actual 2018 tax liabilities.  

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

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