How will the new federal tax law affect state and local tax deductions?
The California Franchise Tax Board has issued its preliminary report on the impact of the Federal Tax and Jobs Act of 2017 on the California tax system (including state and local tax deductions). Items covered:
- Temporary Reduction in Medical Expense Deduction Floor
- Limitation on Deduction for State and Local Taxes
The report illustrates how some elements of the federal tax package affect California taxpayers and impact on state and local tax deductions.
“…Under the new law, taxpayers will still be able to deduct up to $10,000 for state and local taxes paid. Therefore, a taxpayer previously deducting $12,000 would have their deduction reduced by $2,000 because of the limit. …
“The $10,000 [State and Local Tax – “SALT”] limit is one part of a large package of changes to the federal tax code. These federal tax code changes also include provisions that will reduce the federal tax paid by individual California taxpayers and other provisions that will increase their taxes, depending on the income sources, deductions, and other specific circumstances of the individual taxpayer. Two of the most important provisions reducing federal taxes are the increase in the standard deduction and the reduction in tax rates. As a result of these provisions, there are some taxpayers who were previously claiming more than $10,000 in SALT deductions who will have their overall federal tax burden reduced by the changes to the federal tax code. …”
“…Table 4 also shows that, taking the entire federal tax change package into account, of the
2.6 million taxpayers with more than $10,000 in SALT deductions, about 900 thousand California taxpayers have lower federal tax liability under the new law then under the old law, about 100 thousand California taxpayers would have approximately the same federal tax liability, and about 1.6 million California taxpayers have an increase in federal tax liability….”