A Bay Area Tax Issue: SALT (State and Local Tax) and Property Tax Deduction Limits

By Sehr Law Firm // December 18, 2018 // Taylor Hobin, J.D., LL.M.

     There is at least one change enacted by the Tax Cuts and Jobs Act of 2017 that will hit some Californians, particularly Bay Area residents, hard. This is the new limit on the deductibility of state and local taxes and property taxes. The new rule is that a taxpayer may deduct up to, but no more than, $10,000 of their property taxes + state and local taxes or sales tax. Consider that in years past a taxpayer was free to deduct all of their state and local tax, or sales tax (whichever was higher), and all of their property taxes. Now only $10,000 of that amount is deductible.

     For many Americans this change will not have an effect because their state tax and/or property values are not substantial. However, for people who live in high tax states, like California, and in high property value areas, like the Bay Area, this could be a substantial hit. Take for example, a hypothetical couple who recently purchased a $935,000 home (unfortunately, this was the median Bay Area home sale price for June 2018), pays $10,500 a year in property tax in 2018, and together has a taxable income of $200,000 a year (which means they will pay approximately $15,640 in 2018 California state income tax). In 2017, this couple would have an itemized deduction of $26,140, but in 2018 they will be limited to an itemized deduction of $10,000. This could lead to a substantial and unexpected tax hit for this hypothetical couple.

     This issue is of concern for Bay Area residents who are real property owners. Particularly younger homeowners or individuals who have recently purchased homes and do not enjoy the benefit of reduced property tax from long-term homeownership under Proposition 13. It should also be mentioned that this issue only arises if a taxpayer itemizes their deductions, and there will be fewer people taking itemized deductions in 2018 since the standard deduction has risen. However, for those affected, this issue will be substantial and, likely, unexpected.

     The full extent of the effect on Bay Area taxpayers will begin to be realized when we file our taxes in 2018. If this issue interests you and you are looking for an informed tax law attorney for advice, Sehr Law Firm is a good place to start.

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