The State and Local Tax (SALT) Limitation of $10K is still in place for this tax season on your 1040’s. This is a newer issue in taxation since the advent of The Tax Cuts and Jobs Act (TCJA) of 2017.
The concept in taxation was always that you should never be forced to pay a tax on a tax. In other words, the taxes you pay at the state and local level should always be deductible at the federal level.
But this changed with TCJA. In order to get it passed into law, the Trump Administration had to give up the full SALT deduction, because the tax reductions in the overall plan were just too high.
The limitations include your property and state income taxes. The PTETC bypasses this limitation, giving you a full income tax deduction on the state taxes you pay on K-1 income at both the Federal and State Level.
So far, 34 states have passed laws bypassing the limitation. In order to understand this, let’s use an example.
Joanne B. Owner has an S Corp. In 2023 she had a K-1 where she paid taxes on $100K.
Normally, since she’s an Illinois Entrepreneur and Resident, she would pay the 1.5% tax that we all pay on our S Corp Returns at the entity level. This in turn would be deducted off of her corporate return where she received a $1,500 deduction for taxes paid.
But that leaves the 4.95% tax she must also pay at the personal level which is subject to the SALT Limitation. Since she already pays $15K in property taxes, and another $1,500 in state income taxes on her W-2, the additional $4,950 she paid on the $100K K-1 was non-deductible.
The PTETC requires her to pay that $4,950 in individual state income taxes at the entity level. This allowed us to get a federal and state income tax deduction of $6,450 on both tax returns instead of just $1,500.
This reduced both her Federal and State income tax liabilities. A credit for the $4,950 K-1’s through to the Illinois 1040 which then paid the income tax liability at the individual level.
Since she paid a combined federal and state income tax rate of 29%, her savings totaled $1,435 on money she would have paid anyway. If you have more income on your return than $130K, the tax savings would be greater.
Let me leave you with this…
This is a difficult concept for many to understand. I had to read through the professional continuing ed three times before I was able to grasp the concept.
It all comes down to one thing. Instead of getting a tax deduction of 1.5%, you get it for the entire 6.495%.
Yes, it’s true that most states require estimated tax deposits which are unreasonable in the extreme. It requires you to make tax deposits on money you haven’t earned yet. And since we don’t know how much you will make, it’s impossible to do correctly.
Since there’s no reasonable way to do this, most of the time we end up paying an extremely small estimated tax deposit penalty. But the overall tax savings are so high that this problem is never an impediment.
Again, this requires a state tax deposit on roughly 6.495% of your income by December 16th of this year. If you are profitable and own a pass-through entity, don’t miss this opportunity.
This is the second column in my series getting all of you ready for our year end tax planning session. 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.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
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