State and local tax deductions for 2023

What are the SALT deductions?

State and local tax (SALT) deductions are specific types of deductions for people who choose to itemize, rather than go with the standard deductions. There are many benefits to itemizing, as it may allow you to write off more of your taxable income. Put simply, you could pay less in taxes for the year.

How SALT deductions can reduce tax liability

The first thing to do is figure out if you should itemize or take the standard deduction. If the SALT deductions and your other itemized deductions don’t add up to more than the standard deduction, it may not make sense for you to itemize.

For taxpayers who do plan to itemize, there are other factors to consider, some of which are outlined below. Always work with your Jackson Hewitt Tax Pro to discuss your specific situation.

Updates to SALT deductions for 2023

Prior to the 2018 Tax Cuts and Jobs Act (TCJA), you could fully deduct your state and local income taxes. Since the passage of the TCJA, you can only deduct up to $10,000 per year for combined total taxes, or $5,000 for married couples who file separately.

Due to the changes to the standard and itemized deductions following the TCJA, fewer taxpayers are itemizing deductions.

Regardless of filing status, you may live in a state that uses a matching principle when it comes to itemized deductions. This means you must claim itemized deductions at the federal level to also claim itemized deductions on your state income tax return.

What taxes are covered by the SALT deductions?

The SALT deductions include your personal property taxes, real estate taxes, and either your state and local income taxes or your sales taxes, whichever is the largest amount.

Personal property includes movable objects, like your car, a boat, furniture, or business property. Read further for more details about what’s accepted and what’s not.

To itemize, you’ll use IRS Form Schedule A, which is filed with Form 1040 to report itemized deductions. You must choose between the standard deduction applicable to your filing status, or calculate your allowed itemized deductions on Schedule A.

You will begin by entering the total of all your state and local taxes on the matching lines on Schedule A. If the total is $10,000 or less, you can claim it all. The maximum allowable total for SALT deductions is $10,000.

Examples of SALT deductions

If you’re a homeowner who itemizes your tax returns, you may deduct property taxes you pay on your home and any other real estate you own.

• This includes property taxes you pay, starting from the date you bought the property.
• The official sale date is typically listed on the settlement statement you get at closing.

It’s important to note that if you agree to pay the seller's delinquent taxes from an earlier year at the time you close the sale, you are not allowed to deduct them on your tax return. The IRS treats this payment as part of the cost of buying the property, rather than as a property tax deduction.

Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. You can increase your home value by the amount of the assessment. A crucial detail here is that these local benefits taxes are only deductible if they're for maintenance, repair, or interest charges related to those benefits. Talk to your Tax Pro to ensure you’re keeping track of the type of work done and all the receipts.

If part of your monthly mortgage payment goes into an escrow account, and the lender periodically pays your real estate taxes out of the account to the local government, don't deduct the amount paid into the escrow account. Only deduct the amount actually paid out of the escrow account during the year to the taxing authority.

Deductible personal property taxes are those based only on the value of personal property, such as a boat or car. The tax must be charged to you on a yearly basis, even if it's collected more than once a year or less than once a year.

Mortgage interest

The mortgage interest deduction is the next best-known tax benefit claimed on IRS Form Schedule A. Deductible mortgage interest is limited to interest paid on the first $750,000 of the principal loan amount for married taxpayers filing jointly ($375,000 if married filing separately).

Mortgage insurance premiums are no longer deductible as mortgage interest.

Medical expenses

Medical expenses can also be deducted on Schedule A, if they were for you, your spouse, or dependents. This includes medical, dental, or long-term care insurance premiums (with limits), as well as fees paid to doctors, hospitals, mental health services, and prescription drugs that are not otherwise paid by insurance. There are lesser-known medical expense deductions listed in IRS Publication 502.

However, you can only deduct medical expenses that exceed the deduction threshold of 7.5% of your adjusted gross income (AGI). For example, if you have $15,000 of deductible medical expenses, and your AGI is $80,000, your deduction threshold is $6,000. This means you can deduct the amount over $6,000, or in this example, $9,000 ($15,000 - $6,000 = $9,000).

Charitable contributions

Charitable contributions are also deducted on Schedule A. These contributions must be made to an eligible entity, such as a house of worship, school, or a recognized 501(c)(3) charitable organization. If you make noncash gifts, such as donating goods to charity thrift shops, you must value your donation accurately and get written acknowledgement from the organization if your donation is valued at $250 or more. Mileage and unreimbursed expenses for volunteer work are also deductible.

Political donations and gifts to individuals are not deductible. Lesser-known deductions on Schedule A include deducting legal fees paid to get taxable income owed to you, gambling losses, and casualty losses.

SALT deductions change by state

Some states allow for more generous itemized deductions and, in some cases, paying more taxes at the federal level may result in a lower tax obligation at the state level.

States, like New York, New Jersey, California, and others, that have high state income and real estate taxes use their state and local taxes as their option. Others with no income taxes, like Tennessee, Texas, and Alaska, or low-tax states such as Pennsylvania, generally go with the sales tax deduction instead.

For example, if the taxpayer has only paid $1,000 in Pennsylvania income taxes and they paid $1,500 in total sales taxes, they may use sales taxes for itemizing, since it is a higher amount. You would still add the real estate taxes and personal property taxes paid to determine the SALT deductions.

The complexity around the SALT deductions can vary state by state. Questions? Find a Jackson Hewitt Tax Pro near you, who can help you understand and navigate your state’s specific rules and regulations and maximize your SALT deductions.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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