The much touted 2023 Bi-Partisan Tax Bill which passed the House with flying colors is now languishing in the Senate. Given the fact that our hard-working Senators are now on vacation until March 26th, it’s dead.
Even if they brought it up for a vote when they’re back in session, no politician would actually vote for anything that would aggravate their constituency by forcing them to radically amend already filed returns.
Meanwhile, back at the House, the bill doubling the State and Local Tax (SALT) limitation from its current $10,000 limit to $20K has officially died in committee. GOP Members were unable to convince enough of their colleagues to vote for the package.
This means that any hope of dealing with the SALT Limitation on your personal income tax returns won’t be forthcoming this year.
The concept before the 2017 Tax Cuts and Jobs Act, was that Americans were never supposed to pay a tax on a tax. The taxes we pay at the State and Local Level were always deductible at the Federal Level.
But this deduction is now limited to $10K on your Schedule A. In order to understand the issue, let’s set up a scenario.
Joanne B. Owner has a $50K W-2, pays $17K in property taxes on her home, and has a $250K in K-1 income from her S-Corp. Mrs. Owner pays a roughly 5% income tax rate at the state level on her $300K in income which comes to $15K.
Normally on her Schedule A she would get a deduction of $32K in State and Local Taxes for her property tax payments and regular state income tax. But given the SALT limitation, that is limited to only $10K.
While we can’t do anything about the deductions for her property tax payments, or the state tax on her W-2, we can do something about the state income taxes on her K-1.
The Pass Through Entity Tax Credit allows us to pay the 5% tax on her K-1 income at the entity level. This gives her a deduction for the taxes at the entity level which is then deducted on both her personal federal and state income tax returns.
Since she pays an effective Federal and State income tax rate of 40%, the additional $12,500 deduction is worth $5K in less taxes paid. If your K-1 income is larger than this, your savings would also grow.
I realize how complicated this concept is. Only a few of my clients have taken advantage of it, when many more would benefit.
If you have questions, please don’t hesitate to contact us.
Let me leave you with this.
We’ve completed dozens of business returns but are still unable to send any of them out. Why?
Because we’re still waiting on a software update to the Illinois payment voucher.
The Form IL-1120-St-V or payment voucher has a barcode on the bottom. This is how the State logs in your payments.
Similar to when you buy groceries at your local store, the bar code tells the state everything from your EIN to the amount paid and year and form in question. Without this form being perfect, those payments wouldn’t be logged into the state correctly which would cause dozens of problems that no one needs.
The form was supposed to be updated in our software last Friday, but that has now been backed up to next Friday the 23rd. Hopefully, at that point, we’ll be able to get out your returns.
We knew that things would be later than usual this year, but this is ridiculous.
If you have questions, please don’t hesitate to contact us.
We’re all going to get through this. Let’s get through it together.
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Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
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