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For many business owners, maximizing tax deductions is a key strategy to reduce taxable income and keep more money in the business. Itemized deductions, particularly for state and local taxes (SALT), offer opportunities, but there are limitations you should be aware of—especially with the $10,000 cap still in place for 2024. In this blog post, we’ll break down the key aspects of itemized deductions for taxes paid and offer some practical advice for business owners.
The $10,000 Cap on SALT Deductions
Since the implementation of the Tax Cuts and Jobs Act (TCJA), the deduction for state and local taxes paid has been capped at $10,000 ($5,000 for married filing separately). This cap includes:
- State and local income taxes or general sales taxes
- Real estate taxes
- Personal property taxes
For many business owners, this cap represents a limitation, especially if you live in a high-tax state or own multiple properties. However, by understanding the rules and making smart choices about how to allocate these deductions, you can still optimize your tax return.
Choosing Between State and Local Income Taxes or Sales Taxes
You have the option to deduct either state and local income taxes or general sales taxes, but not both. This decision can impact your overall deduction, so it’s important to evaluate which provides the bigger benefit. For example:
- State and local income taxes can include withholding from your W-2, estimated tax payments, and even taxes paid on a prior year’s return.
- Sales taxes can be calculated based on either actual taxes paid or through the IRS’s optional sales tax tables.
The Importance of Staying Informed
The tax landscape for business owners is always evolving, and it’s important to stay up to date with any changes that may affect itemized deductions, particularly with regard to state and local taxes. While the $10,000 SALT cap continues to present a challenge for those in high-tax areas, smart tax planning can help reduce its impact.
Conclusion
Navigating the $10,000 SALT cap is a challenge for many business owners, particularly those in states with high taxes. By carefully choosing between income and sales tax deductions, leveraging strategies like bunching, and ensuring business-related property taxes are deducted properly, you can optimize your tax position and potentially lessen the burden of the SALT cap. As always, working closely with a tax professional ensures that you’re making the most of the deductions available and staying compliant with current tax laws. For 2024, smart planning and informed decisions will be key to maximizing your itemized deductions and keeping more money in your business.
