You’ve probably heard about the adjustments to the state and local tax deduction. The 2017 tax reform made sweeping changes to how much you can deduct.
To better understand the changes that went into effect for 2018, here are the answers to the most commonly asked questions about the new laws around state and local taxes.
Can I still deduct state and local taxes as itemized deductions?
Most state and local income taxes are still deductible as itemized deductions. The question now, however, is whether you need to deduct them. The standard deduction for 2018 increased. It’s twice as large for married couples filing jointly as it was in 2017. When you file your tax return each year, you always have the option of itemizing your deductions or claiming the standard deduction. Your choice depends on whether the total of your itemized deductions is larger than the standard deduction.
Therefore, the larger standard deduction in 2018 may be more beneficial in reducing your taxable income than it was in previous tax years. Keep in mind, that doesn’t mean you “lose” the state and local tax deduction. It just means you don’t need to claim it in order to pay the least amount of tax.
Are there restrictions on the state and local tax deduction?
Another adjustment to the state and local tax deduction is the dollar amount you can deduct. As of Jan. 1, 2018, the deduction is capped at 10,000 dollars for the full tax year. That means you can deduct up to $10,000 in property and income tax or sales tax on Schedule A. Previously, the deduction was unlimited.
The cap applies to most filing statuses. Single filers and those married filing jointly are both subject to the $10,000 limit. The cap for a married person filing separately is $5,000.
There is one detail that remains unchanged. You still must choose to deduct either your state income tax or sales tax. You cannot deduct both amounts.
Are state taxes, such as property tax that I deduct on a business return impacted?
The new $10,000 limitation on the state and local tax deduction does not apply to taxes you deduct on a business return. That means your deductions on Schedules C, E, and F are safe.
For example, say you own a rental property that you rent out most of the year. You pay $15,000 per year in real estate tax on it. You deduct the $15,000 on Schedule E with your other rental expenses. It is not subject to the $10,000 annual limit. It also does not reduce the amount of state and local tax you can deduct on Schedule A.
What about my vacation home? Can I still deduct the property taxes I pay on it?
It depends. If you rent your vacation home out less than 15 days per year, you should still report your real estate taxes for the vacation home on Schedule A with your other real estate taxes. If your combined real estate and other state and local taxes exceed $10,000, they will be limited by the new rule.
If you rent the vacation home out for 15 or more days during the year, but you report property taxes allocable to rental use on Schedule E, the business portion of your property tax is not subject to the $10,000 limit.