It may have been said that someone can have too much “salt” in their diet and a restriction is the best medical step for recovery or prevention of diseases. However, in tax planning, a restriction on SALT is one of the biggest hits to taxpayers.
In tax planning, SALT actually refers to “State and Local Taxes.” These are typically taxes such as state income tax and property taxes.
Up until January 1, 2018, these were taxes paid by a taxpayer to the state (or city) they lived and then were deducted on their federal tax return (form 1040). Although it wasn’t much fun to pay the state government taxes, it was useful to at least get a deduction on your tax return to Uncle Sam.
After the passing off the Tax Cuts and Jobs Act in 2018, the unlimited SALT deduction was capped at $10,000.
That’s right. You heard me correctly.
Your total SALT deduction that passes through to your personal federal tax return is $10,000.
Let’s put this in perspective.
Assume you live in California. You have a state tax bill of $30,000 and a property tax bill of $20,000. That’s a total State and Local Tax (SALT) bill of $50,000.
However, due to the deduction cap, you’re now limited to a total deduction of $10,000. You’ve completely and utterly lost $40,000 of deductions! Assuming you’re at a 50% tax bracket, that’s an additional $20,000 you pay in tax this year!
So, you’re probably wondering, what do you do to circumnavigate this draconian law?
First, begin tax planning. The best thing you can do to reduce your state income tax is to utilize every strategy available to you to reduce your taxes. In effect, you should never pay even one dollar more than you legally are obligated to. That begins and ends with tax strategy.
Accountants aren’t magicians. They certainly can’t make things appear from nothing. To reduce your taxes, you must implement tax strategies.
Money can only move one of two ways: either money goes to the abyss, aka Uncle Sam, or money traverses through different tax strategies and moves from your left pocket to your right pocket.
My advice is to work with an accountant that focuses on tax strategies.
Just a tip – if your current strategy is to contribute to your retirement account and meet with your accountant once per year at tax time, you’re overpaying in tax.
Second, utilize a land trust for your property tax.
A land trust is a revocable simple (changeable) real estate trust designed to hold real estate. The beneficiary of the LLC is an LLC, taxed as a corporation.
The beauty of having the LLC taxed as a corporation is that corporations don’t have the same SALT deduction cap as individuals. Furthermore, because the land trust is a simple trust, the beneficiary of the trust is responsible for all income and taxes.
Ultimately, the land trust will remove the property tax calculation from your SALT total.
If we use the example above, the taxpayer is now purely dealing with a $30,000 state income tax bill minus the $10,000 SALT deduction cap. The full $20,000 property tax bill is deducted through the corporation.
A land trust is a relatively simple solution for a relatively complicated issue, aka SALT deduction cap. Take action today. There is no reason to overpay Uncle Sam.
If you’re not utilizing a land trust, you’re likely overpaying the government and letting them enjoy the fruits of your hard earned labor.