New Tax Limitation on State and Local Deductions for Individuals

The start of 2018 brings plenty of new changes to the U.S. tax code for individuals and businesses.  One such change involves new limitations on state and local tax deductions for individuals.

Beginning in 2018, the Tax Cuts and Jobs Act (“FCJA”) now generally limits an individual’s ability to claim federal itemized deductions for state and local (and certain foreign) taxes.  The FCJA provides that an individual may claim an itemized deduction for any taxable year – up to a maximum amount of $10,000 for combined state and local personal property taxes, real property taxes, and income taxes paid or accrued during the year.  Married individuals filing separately have a $5,000 per year limit. Certain foreign and sales taxes are also included.

This limitation does not apply to state, local, or foreign property taxes.  It also does not apply to state or local sales taxes that are paid or accrued in carrying on a trade or business or for the production of income.  However, the limitation does apply to state and local incometaxes paid or accrued in carrying on a trade or business or for the production of income.

The limitation on state and local tax deduction has a sunset provision and is set to expire after 2025. 

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