SALT is an acronym for state and local taxes and there has been a lot of discussion regarding their impact. The Tax Cuts and Jobs Act which Congress passed in December 2017 went into effect for tax year 2018 and specifically limits federal SALT deductions to $10,000. This limitation will affect tax filers differently. Those in higher tax states will reach the limit sooner than those in lower tax states. But SALT is not the only issue for tax filers. While politicians always talk about simplifying tax code and the filing process this new law missed that mark. There are many factors which may affect your specific situation such as; filing status, income, marginal tax rates, whether you use the standard deduction or itemize deductions and more.
The state tax portion of SALT is comprised of your state income tax paid and any capital gains incurred which in California, is taxed at the same rate as your income. The local tax portion primarily comes from property taxes. Property taxes are collected by the county tax assessor’s office based on your property’s assessed value.
It always helps to understand marginal versus effective tax rates. Follow this example of federal marginal tax rates for a married couple filing joint for tax year 2018: Your first $19,050 of income is taxed at 10%; income from $19,051 to $77,400 is taxed at 12%; income from $77,401 to $165,000 is taxed at 22%. A married couple filing jointly who has household income of $80,000 would pay $1,905(10%) for the first $19,050 of income and $7,002(12%) for the next $58,350 of income and $572(22%) for the remaining income. The total is tax of $9.479 which is an 11.8% effective tax rate for $80,000 of household income although they are in the 22% marginal tax bracket. Clear as mud, right?
California’s marginal tax rates range from 1% to a 50-state high of 13.3% for ultra-high-income earners ($1million for single and $1,074,996 for joint filers). To put these tax numbers in a local perspective, the median household income for San Joaquin county is $57,813 (US Census Bureau). The California marginal tax rate on this median income for a single filer would be 8% and for married filing joint would be 6% (boe.ca.gov).
The following showcases the effective California state tax rate for two different filing situations: married filing jointly (with 4 child tax credits) with a household income of $100,000 would have an estimated effective state tax rate of 1.8% or $1,798; while a single filer (Standard deduction only) would have an estimated effective tax rate of 6.15% or $6,149. You can see there is a large swing depending on your familial situation and eligibility of deductions. These numbers do go up substantially as income increases for both examples.
Property taxes in California are limited by the controversial yet beloved Prop 13 which has helped home owners keep their tax bills down for decades. Side note: There is a movement to eliminate Prop 13 tax assessment limits for commercial properties which is referred to as a “split role” tax. If businesses pay more in property taxes, they will pass this through to consumers, just saying. Again, for local perspective in San Joaquin according to tax-rate.org the median owner-occupied home value is $318,600 and the average property tax collected in San Joaquin is 0.73% or $2,326.
From the examples above, if you are a single tax filer earning $100,000 and living in a $300,000 home, you will come close to maxing out the SALT deductions ($6,149 state income tax + $2,326 property tax = $8,475 total SALT) and if a joint filer with the same numbers you will be far from it ($1,798 state income tax + $2,326 property tax = $4,124 total SALT). For those of you earning $200,000 and above you will be probably be negatively impacted by the SALT limitations. For people who own property with higher valuations which comes easy in California, then you may also be negatively impacted by the SALT limitations.
Every situation is different. I am simply giving you a high-level picture of how SALT deductions may or may not affect you. As always, consult with your team of professionals and in this case specifically your tax professional for advice on your situation. Until we talk again, be well.
(Sources: US Census Bureau, tax-rates.org, USGovConnect.com, Reference.com, boe.ca.gov, GFOA)
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