Elimination of State and local taxes above $10,000
All state and local taxes above $10,000 are eliminated under this new law. This applies to all state and local taxes such as state income tax, property tax, and sales tax.
Sandy’s elaboration: Frankly, this $10,000 allowance is illusory for most people since they probably won’t itemize deductions because of the doubling of the standard deduction. Remember, you can only take itemized deductions that exceed the standard deduction.
Moreover, Congress thought of the tax planning tip of prepaying your state income taxes and property taxes. Under the reconciliation, this won’t be deductible for taxes prepaid for next year. In order words, a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, can’t claim an itemized deduction in 2017 for that prepaid income tax.
Prepaid property taxes probably won’t be deductible either unless these taxes are already assessed as of Dec. 31 in your state.
Note: Our tax system is integrally involved with our economic system. Reducing the amount of property tax that can be deducted as well as reducing the need to itemize deductions might result in a reduction in home values by an estimated 5%-15% according to many economists. This might have been avoided had Congress phased out the property tax deduction over several years, but this didn’t happen.
Sandy’s hot tip: While the state sales tax is eliminated, it is only eliminated for personal property not used in a trade or business. If the property such as a car or desk is used in a trade or business, you can deduct the sales tax as a business expense to the extent the property is used for business. Also, state property taxes, even though in excess of $10,000, would be partly deducted on your Schedule C if you claim a valid home office deduction as a self-employed business owner or as an independent contractor.
As I have said in prior posts, this tax law gives businesses and independent contractors major benefits that people that are solely employees don’t get.
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