State & Local Taxes (SALT) Deduction

The State and Local Tax (SALT) deduction is one of the most significant itemized deductions available to taxpayers. However, the Tax Cuts and Jobs Act of 2017 (TCJA) imposed a $10,000 cap that dramatically changed the tax landscape. Understanding the SALT rules is essential for EA exam success and practical tax preparation.

The $10,000 SALT Cap

Key Rule for 2024: The total deduction for all state and local taxes combined is limited to:

• $10,000 for all filing statuses EXCEPT Married Filing Separately
• $5,000 for Married Filing Separately (MFS)

This cap applies to the sum of:

• State and local income taxes (OR general sales taxes)
• State and local real property taxes
• State and local personal property taxes

Important: The $10,000 cap was enacted under TCJA and applies to tax years 2018 through 2025. Before 2018, there was no cap on SALT deductions.

EA Exam Tip: The May 2025 - February 2026 testing window tests 2024 tax law. For 2024, the SALT cap remains $10,000/$5,000. Remember that many taxpayers who previously itemized now take the standard deduction because the SALT cap limits the benefit of itemizing.

Components of the SALT Deduction

The SALT deduction reported on Schedule A (Lines 5a-5c) consists of three potential components:

Line 5d: Total state and local taxes (sum of 5a + 5b + 5c) Line 5e: Enter the smaller of Line 5d or $10,000 ($5,000 if MFS)

The Income Tax vs. Sales Tax Election

Taxpayers must make an annual choice between deducting:

1. State and local income taxes, OR
2. State and local general sales taxes

You cannot deduct both—you must choose one method for the entire tax year.

Which to Choose?

Calculating the Sales Tax Deduction

If electing the sales tax deduction, taxpayers can use:

1. Actual receipts - Track and total all sales tax paid during the year
2. IRS Optional Sales Tax Tables - Based on income, family size, and state (Publication 600)
3. IRS Sales Tax Deduction Calculator - Available at IRS.gov

Bonus: When using the optional tables, you may ADD actual sales tax paid on:

• Motor vehicles (cars, trucks, motorcycles)
• Aircraft
• Boats
• Mobile homes
• Building materials for home construction

Deductible vs. Non-Deductible Taxes

Understanding which taxes ARE and ARE NOT deductible is critical for the EA exam:

Foreign Taxes: Credit vs. Deduction

Foreign income taxes receive special treatment—you must choose to either:

1. Claim them as a deduction on Schedule A (subject to SALT cap), OR
2. Claim them as a credit on Form 1116 (dollar-for-dollar reduction of tax)

Critical Rule: You cannot do both. If you claim a credit for ANY qualified foreign taxes in a year, you must claim a credit for ALL of them. You cannot deduct any foreign taxes that year.

Which is better? In most cases, the foreign tax credit is more beneficial because:

• A credit reduces tax dollar-for-dollar
• A deduction only reduces taxable income
• The credit can be claimed even if you take the standard deduction

EA Exam Tip: Questions often test whether a taxpayer should claim foreign taxes as a credit or deduction. Remember: credit usually wins, and you cannot mix methods in the same year.

Foreign Real Property Tax—NOT Deductible

Important TCJA Change: For tax years 2018 through 2025, foreign real property taxes are NOT deductible as itemized deductions on Schedule A.

This applies to:

• Property taxes paid on a vacation home in another country
• Real estate taxes on foreign rental property (though these may be deductible as a rental expense on Schedule E)
• Any real property tax paid to a foreign government

Exception for Rental Property: If the foreign property is a rental, the real property taxes may be deducted as a business expense on Schedule E against the rental income—not subject to the SALT cap.

Personal Property Taxes

Deductible personal property taxes must meet two requirements:

1. Be imposed on an annual basis, AND
2. Be based on the value of the property

Example: A state vehicle registration fee of $50 flat fee is NOT deductible. However, if the fee includes $200 based on the vehicle's value plus $50 flat fee, the $200 portion IS deductible.

Common deductible personal property taxes:

• Vehicle registration fees (value-based portion only)
• Boat registration fees (value-based portion only)
• Ad valorem taxes on personal property

State Tax Refunds: The Tax Benefit Rule

When a taxpayer receives a refund of state income taxes, it may be taxable income in the year received. This is governed by the tax benefit rule.

General Rule: A state tax refund is taxable to the extent the taxpayer received a tax benefit from deducting the state taxes in the prior year.

Three Scenarios:

Scenario 1: Took Standard Deduction If the taxpayer claimed the standard deduction in the prior year (did not itemize), the state refund is NOT taxable. No tax benefit was received from the state tax payment.

Scenario 2: Itemized and Received Full Benefit If the taxpayer itemized and their SALT deduction was under the $10,000 cap, the refund is fully taxable.

Scenario 3: Itemized but Limited by SALT Cap If the taxpayer itemized but was limited by the $10,000 SALT cap, the refund may be partially taxable, fully taxable, or not taxable—depending on whether a tax benefit was received.

Example (Tax Benefit Rule with SALT Cap):

• In 2023, Sarah paid $12,000 in state income taxes and $5,000 in real property taxes
• Her total SALT was $17,000, but she could only deduct $10,000 (SALT cap)
• In 2024, she received a $2,000 state tax refund
• Because her state taxes still would have exceeded $10,000 even after the refund ($10,000 vs $10,000 cap), she received NO tax benefit from the overpayment
• The $2,000 refund is NOT taxable

Reporting: Taxable state refunds are reported on Schedule 1, Line 1 (State tax refund). The taxpayer will receive Form 1099-G showing the refund amount.

Schedule A Reporting

The SALT deduction is reported on Schedule A (Form 1040), Lines 5a through 5e:

EA Exam Tips: SALT Deduction

1. Cap amounts: $10,000 for all filers except $5,000 for MFS
2. Income vs. sales tax: Choose one, not both—annual election
3. Foreign income taxes: Credit OR deduction, not both
4. Foreign real property taxes: NOT deductible 2018-2025
5. Personal property taxes: Must be based on VALUE to be deductible
6. State refunds: Apply tax benefit rule—not taxable if standard deduction taken or no benefit received due to SALT cap
7. Federal taxes: NEVER deductible (federal income tax, Social Security, Medicare)
8. TCJA expiration: The $10,000 cap applies through 2025; after that, legislation may change the rules