Deduction Limit and SALT Cap for California’s Creative Workarounds

The tax year 2017 Tax Cuts and Jobs Act has presented very severe needs to homeowners in high-cost jurisdictions such as California by capping the State and Local Tax deduction at $10,000. A cap on income, sales, and property tax deductions was a blow to a state with already high rates, with skyrocketing property values.

The cap also aroused political and financial warfare, as California and others chose to devise novel workarounds. Residents who are experiencing the pressure fully must continue to learn about these ideas and the tax situation as a whole in order to deal with the situation. Look for a tax audit attorney in San Diego who will help you.

Why the Cap Might Hurt?

a.      SALT deduction used to formerly provide substantial relief, as it allowed a taxpayer to deduct a state and local tax amount from the amount of federal taxable income.

b.      A dual-income California Bay Area or Los Angeles family paying that state an income tax of $35,000 and a property tax of $20,000 benefited greatly by deducting the higher amount of $55,000.

c.       By limiting the federal deduction to $10,000 per year, most of this advantage has been eliminated, leaving a de facto increase in federal taxation through limited federal deductions for the provided middle- and upper-middle-income Californians.

d.      In addition to stretching household budgets, it stoked the controversy of whether double taxing an income already taxed to state and local governments was just.

Check the Details on Creative Workarounds

California, which has been very active in countering the impact of the SALT cap, has now come up with the Pass-Through Entity (PTE) tax election, an elegant but successful measure. Rather than deeming business to be taxed on an individual basis and subject to individual taxation, business income is taxed on an entity-wide basis through S corporations, partnerships, and LLCs that elect to collect state tax on total income.

This state levied a tax that is fully deductible at the federal level, and avoids the SALT cap. Owners are credited, against their share of the tax, a dollar-for-dollar California tax credit, thereby not being taxed twice. Basically, it turns a non-deductible personal tax into a deductible business cost, and affords great federal savings.

Issues and Considerations for People

1.      Although successful, the PTE tax workaround is not all-inclusive.

2.      It is limited to owners of pass-through businesses, not the W-2 employees. The election is complicated to figure out and will necessitate annual calculations, amended returns, and state filings.

3.      Businesses should reserve enough cash to pay the entire state tax on income, which may be in advance property of the owners.

4.      Furthermore, there are cases in which the federal Alternative Minimum Tax restricts the advantage. Better to find an EDD audit attorney when you are in trouble.

5.      The art of avoiding these considerations is to plan carefully to both maximize federal deductions as well as keep cash flow and compliance costs affordable to eligible business owners.

The SALT cap is controversial; however, the PTE workaround in California presents an authentic chance at recouping deductions to business owners in the state. Taxpayers, with the help of expert advice, can go through this strategy and maximize their overall tax position.