Tax Reform Limits State and Local Tax Deduction

One of the areas affected by the Tax Cuts and Jobs Act (TCJA) is individual itemized deductions.  This article will address one specific itemized deduction, among several, that will be impacted.

There is a new limit placed on individual’s itemized deductions of various kinds of nonbusiness taxes which became effective beginning with the 2018 tax year.

Before the changes were effective, individuals were permitted to claim deductions for various nonbusiness taxes such as state income taxes, real estate taxes and personal property taxes (ie car tags).  In some cases, taxpayers could deduct sales taxes if those taxes exceeded their state income taxes.

For tax years 2018 through 2025, the Act limits deductions for taxes paid by individual taxpayers in several ways. It limits the aggregate itemized deduction for the combined real property taxes, personal property taxes, state and local income taxes and sales taxes for any tax year to $10,000 ($5,000 for married people filing separately).

There is an exception to this limit:  It does not apply to state, local or foreign real property taxes or to personal property taxes if those taxes are paid or accrued in carrying on a trade or business or in an activity engaged in for the production of income.

This new limit makes it vital that you consult with your professional tax advisor to analyze your individual tax situation.

Additional articles regarding other changes to itemized deductions by TCJA will be coming soon.