Earlier this November, a plan was introduced in the U.S. Senate that can significantly impact the way taxes are handled throughout the nation, and particularly in Illinois. Among the changes it proposes are elimination of federal deductions for state and local taxes.
The SALT Deduction
State and local taxes, also known simply as SALT, have until now been deductible from federal taxes. In other words, you can take the total amount you pay in SALT and subtract that from your taxable income on your federal tax return as an itemized deduction. This helps relieve the tax burden on all states, but it is especially beneficial for Illinois residents who have among the highest property and income tax rates in the nation.
The changes proposed in the senate would mean this amount cannot be deducted anymore. Perhaps to alleviate the impact of this, the House of Representatives has proposed that a maximum of $10,000 can still be deducted in property taxes.
Impact on Illinois Residents
The average Illinois homeowner pays nearly $4,000 in property taxes each year, and the tax rate is about double what most other states pay. Adding in state income taxes and sales tax, the amount increases to over $8,000 per person on average.
This means that eliminating the SALT deduction completely could mean an extra $8,000 being counted toward taxable income for each taxpayer in the state. When we factor in the exception for up to $10,000 in property taxes proposed by the House, that drops to a little over $4,000, but it can still result in a heavy blow to the already heavily taxed Illinois population.
This, of course, is a fairly basic view of the impact the proposal would have on Illinois residents. The exact changes that would occur in any individual’s tax burden would depend on their situation, income, property, and so forth.
For example, some taxpayers won’t be affected at all, particularly those who don’t itemize their taxes anyway. Likewise, wealthier households that have to pay the alternative minimum tax may not be affected either since doing so can eliminate the SALT deduction. On the other hand, those who rely on itemized deductions to minimize tax exposure could end up paying hundreds or thousands more per year.
Minimizing Tax Burdens
Regardless of what happens with the proposal, thinking ahead and making a solid tax plan is sound practice. There are many deductions that taxpayers in the state can take advantage of as well as many ways of managing finances and assets that can minimize the burdens they pose. This requires careful planning as well as an extensive knowledge of how federal and state laws apply to your specific situation.
- Some of the ways you can minimize your tax obligations include:
- Properly structuring corporate entities to minimize tax exposure
- Contributing to retirement funds
- Handling securities in a tax efficient manner
- Contributing to charitable or humanitarian causes
- Planning ahead for property value assessments
- Putting together an effective estate plan
When making your tax plan, it helps to have the assistance of an experienced tax attorney on your side, especially when it comes to complex matters. Hart David Carson, LLP, can help you prepare for changes to SALT deductions and other shifts in tax law.