Alright faithful reader, this post is in the tax weeds a little bit but worth your time. One of the most discussed and impactful tax changes that came about in the Tax Cuts and Jobs Act (TCJA) from 2018, came in the form of limiting the itemized deduction that tax payers could claim on a personal return for state income taxes paid. You may be saying “TGHA (that’s me), what in the world are you talking about?”
Prior to 2018, taxpayers who paid state income taxes were allowed to take an itemized deduction on Schedule A for those taxes as well as some others, such as property taxes. This greatly benefited residents in states that assess a high state income tax in addition to the Federal income tax ( cough, California & New York, cough, cough). The TCJA changed all of that. It placed a cap on the deduction of state taxes of nearly all types to $10,000. Immediate uproar ensued from the states accustomed to the old ways of financing their state budgets at the expense of the federal government. That’s harsh but true from a certain point of view
Now residents of these states would be unable to deduct these high taxes, effectively increasing taxes on residents of states that charge their residents a high price for the privilege of residing there.
So that is the state of things here in 2024. The state tax cap is in effect. All taxpayers have a capped deduction at $10,000 regardless of how much income tax or property tax you pay. Now, the important part, what can you do about it?
The first and most obvious thing – MOVE. This isn’t a cute acronym. Many US citizens are moving from high tax states to lower tax states. Some have taken to calling themselves “Tax Refugees”. An option that is always on the table is picking up your home and moving somewhere less expensive. This can be real dollars. If you move from a state with an upper rate of 13% to a state with no income tax, this is huge boost to your standard of living. Here at TGHA, we strive to pay as little tax as we are legally allowed. Relocation helps reduce tax at a personal level and it holds law makers accountable to the legislation that pass instituting theses taxes. Check out these stories here to see how effective relocation can be.
Many times, taxpayers can’t move for one reason or another. What else can you do? Most states have now offer a work around of the state tax cap for individuals who own a partnership or S Corporation. It is common referred to as the “Pass Through Entity” Tax (PTE).
Most states have recently passed legislation allowing owners of a partnership or S Corporation to pay the personal state income tax liabilities of the shareholders, out of the business account and have the business take the deduction from income for those taxes. This shifts the state income tax from being a personal expense of the shareholder to a business expense, where there is no cap on state income taxes. The tax expenses reduce the amount of income that “passes-through” to the shareholders (accountants aren’t the most creative when titling things) effectively providing a state income tax deduction that would otherwise be capped if the same shareholder attempted to deduct these taxes on their personal return instead. We could walk through a numerical example at this point, but I don’t want your eyes to glaze over if you have stuck with me so far.
If you own an S Corp, partnership, or LLC and aren’t taking advantage of this, ask your accountant why not? Don’t be mean about it, accountants are mostly good people. Also, if you tell them you heard about it on the internet, they will immediately think you mean TikTok, and then look at you suspiciously. There is a lot of less than reputable info floating around out there.
Thanks for reading. Drop a note in the comments below. Until next time…
