In 2017, the Tax Cuts and Jobs Act went into effect, limiting the SALT deduction to $10,000 and doubled the standard deduction amount. This action was thought to be punitive to high tax Northeastern states and California, predominantly controlled by democrats.
Recently, the U.S. Senate and House passed a $3.5 trillion FY2022 Budget Resolution Framework. The Framework, which is only nine pages, will be used as a template to write the budget legislation that will become 1000’s of pages of text. On page three of this document, it has the words “SALT cap relief.” What does this mean?
If you count the Vice President’s tiebreaker vote, the democratically controlled House and Senate would like to do away with the SALT Cap and/or increase it substantially. If it becomes law, this change would probably not become effective until 2022.
You may want to take action now to address this opportunity. There are several things you could do to take advantage of the upcoming changes. For instance, you could choose to not pay 3rd and 4th quarter state estimated tax payments until 2022. Postponing payments could enable you to reduce your 2022 federal income tax while not affecting 2021 taxes because of the SALT Cap limitation. However, there is a possible cost of an underpayment of estimated tax penalty at the state level. Additionally, you could possibly delay paying your property taxes until 2022 might also be an effective strategy.
There are important questions to answer to plan properly:
- Do you expect to itemize in 2021?
- Does the SALT CAP limit you currnetly?
- Would you itemize assuming an increased CAP?
- What would be the state underpayment penalty be by deferring payments until 2022?
While there is no guarantee that the legislation will become law, deferring state tax payments to 2022 may be a viable tax savings strategy without increasing 2021 taxes.
Planning will be key to ensure if this will work with your individual situation.