The $ 3.5 trillion Senate budget framework approved today calls for increased taxes for high income earners, but it also calls for what could be significant tax relief for the same group: of the SALT cap ”or relief from the current cap of $ 10,000 on state and local tax deduction. This has important implications for the estimated third quarter 2021 tax payments due on September 15.
If you live in a state with high income tax, it may be beneficial to defer any state income tax payment from September 15 until January 2022. By deferring these payments from the State, you may be able to deduct them and save. The larger your estimated tax payments, the greater the potential savings.
“Anyone paying quarterly estimates should work with a tax professional to assess their reduction,” says Robert Keebler, CPA in Green Bay, Wisconsin. “This is also something that trustees should think about doing also for large trusts that owe a lot of money in assessed taxes.”
Here is how it would work. Millions of Americans pay state income tax estimates on a quarterly basis. What you pay into the system in state and local taxes in one year is deductible on your federal income tax return the following year if you itemize the deductions. The Trump Tax Cuts & Jobs Act, which lowered income tax rates and doubled the standard deduction, set a temporary cap of $ 10,000 on the amount you can deduct from state and local taxes until the end of the year 2025. It hit taxpayers, especially high income taxpayers. , in high tax states. California, for example, has a maximum rate of 13.3%; Hawaii’s is 11%; that of New York is 10.9%; That of New Jersey is 10.75%. These are among the states that would benefit the most from lifting the cap.
The budgetary framework does not explain exactly what this means by lowering the SALT ceiling. This is unlikely to be a repeal of the cap, although Senate Majority Leader Chuck Schumer (D-NY) has argued for the repeal. It is more likely that the limit will be raised, say $ 50,000 or $ 100,000. “They’re not going to repeal the cap and help billionaires,” Keebler predicts. Nonetheless, any increase in the cap could still help taxpayers in high tax states.
Suppose you owe $ 40,000 in the state of Wisconsin estimates (the state’s highest tax rate is 7.65%) and you pay 90%. If you skip your estimated payment of $ 9,000 in September and pay it in January instead, assuming you can claim the SALT deduction in 2022, your savings would be over $ 3,000, after paying a penalty. less than $ 250. The federal tax savings are relatively easy to calculate (9,000 times 37% in this example).
The estimated tax payments in the third quarter are essentially on autopilot for most taxpayers who owe them. In this case, you might want to remove it from autopilot. It’s also worth considering lowering your income tax withholding if you’re a W-2 employee, Keebler says. The savings vary widely from state to state. It depends on your tax rate, the state you’re in, and the interest rate / penalty your state charges for late in estimated quarterly payments. If you have a local property tax bill due this fall that you can carry forward to January 2022, that might make sense, too.
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