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A look at estate planning and the new SALT deduction limits

Given extensive changes coming with the new federal tax law (the Tax Cuts and Jobs Act of 2017), it is a good idea for all taxpayers, especially those in higher income brackets, to sit down with an estate planning attorney to discuss whether their estate plans should be changed.

One aspect of the new law that may affect many Californians is the new limitation on the state and local tax deduction, known as SALT.

What is the SALT deduction?

For over 100 years, a taxpayer itemizing deductions on his or her federal return could take an unlimited deduction for either state and local income or sales taxes paid, plus for state and local property taxes paid. The new law caps SALT deductions at $10,000 of combined SALT income and property taxes for tax years 2018 through 2025. The same limit applies to both single and married filing statuses.

The SALT deduction helps people who own extensive or expensive real estate holdings by effectively having the federal government subsidize the corresponding property taxes paid to state or local governments. This deduction has been used extensively by Californians - not surprisingly, considering the level of wealth and relatively high property values here.

Estate planning ideas for the SALT property tax deduction limit

There may be estate planning techniques that can help to alleviate the financial impact of the new SALT property tax deduction limit. Some approaches could include:

  • Consider whether a part of a residence could be used for business purposes with favorable tax treatment. Could you move your office into part of your home to gain a business deduction or are there rental opportunities for the premises?
  • Real estate could be transferred to a limited liability company or LLC and then to a particular type of non-grantor trust that is a separate taxpaying entity from the person creating and funding it. The trust may be eligible for its own SALT deduction up to $10,000 in certain situations. The trust would have to own sufficient investment to generate income from which to deduct SALT.

At Duggan Law Corporation, we create comprehensive estate plans for people to maximize their assets and wealth during their lifetimes and for the benefit of their families and beneficiaries after death. A solid estate plan in place now can help to alleviate estate litigation later.

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