SALT tax question

[Mike NJ]

A question came up about which tax should be applied to the 10k cap of SALT.  Lets say my client has 20k in state income taxes withheld from his salary and lives in a house with 10k of real estate taxes.  Can I apply only the real estate tax deduction for his itemized deductions to avoid have to claim the his state income tax refund as income on his Federal return for 2019?  Thank you in advance for your help.

[Accountant-Man · Accepted solution]

Tax benefit rule, Rev Rul 79-15. I have that memorized since 1982.

[TaxGuyBill]

§111(a):  Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.
https://www.law.cornell.edu/uscode/text/26/111

[itonewbie]

Since the SIT does not given rise to any tax benefit as R/E taxes on its own would have reached the limit for tax deductions, the refund of SIT would be part of the recovery exclusion and should not be taxable.

[Mike NJ]

that is also my opinion.  I did not see anything in the Schedule A instructions about which tax gets applied first or if there would be a ratio.  This question came up at the end of a seminar today and I wanted to see if there was anything I missed prior to tax season about this question.  

[TaxGuyBill]

It wouldn't be in the 2018 instructions because that won't apply until 2019.

It has always been a 'was the deduction able to be used ... if so, the recovery is taxable' type of thing.  So because it wasn't able to be used, it won't be taxable.

[abctax55]

My brain is quite full too (LOL) but I seem to remember that there has to be an allocation/ratio computation.  I haven't had a chance to see how Lacerte is approaching it yet.

I like Jensen's answer best tho !

[Accountant-Man]

Also, your question for a state that allows itemized deductions, but don't include state income taxes on its Sch A. If the 10k that are used on the federal are RE tax, then all 10k are allowed on the state.

If the 10k allowed on the federal are all state income tax, then NONE are allowed on the state.

Otherwise, in your situation, two-thirds on the federal are income taxes and one-third are RE tax.

Some states, like NY, have standard deductions so it doesn't matter.

[Just-Lisa-Now-]

I feel like they talked about this in the seminar I was in back in Dec (it was late in the day and my brain was full by then!)....couldn't you use the real estate taxes and take sales tax deduction rather than the state tax...wouldn't that avoid having to claim the state refund as income the following year?

[itonewbie]

It doesn't change much if sales tax is taken in lieu of SIT because there is a special rule that would require you to take into account the difference between the two if SIT is refunded.

[abctax55]

Lacerte handles that really well....and I have always collected sales tax info even *knowing* in advance that SIT would be larger.

[Terry53029]

If either tax results in a refund it will be taxable next year, so long as he itemizes this year. Check out tis IRS link

https://www.irs.gov/faqs/interest-dividends-other-types-of-income/1099-information-returns-all-other...

[Mike NJ]

my question is do I have a choice of which tax I want deducted on my client's tax return.  If both the state income tax and real estate tax are over 10k does it matter which one gets included on schedule A?  I understand that if only real estate tax deduction is used then next year my client would not have to include any income tax refund on his 2019 tax return.

[TaxGuyBill]

It will work the SAME way as State Income Tax deductions ... the next year you will only pay tax on the portion that was ACTUALLY deducted.
https://www.irs.gov/pub/irs-pdf/p525.pdf#page=25