Lawmakers in Congress have made two separate proposals toward tax reform, with the House of Representatives having released its version in early November and the Senate having followed suit shortly thereafter. The provisions of the two proposals aren't identical, but one thing that they share is the elimination of certain key deductions that individual taxpayers have taken for years. One of the most important of those endangered provisions is the deductibility of state and local income or sales taxes, and the potential loss of those deductions has millions of taxpayers upset, especially in states that have particularly high tax burdens. Here, you'll learn exactly how much people benefit from these deductions and what their loss could mean for typical American taxpayers.
What current tax law allows
Under current law, you can take money that you pay to your state or local tax authority for income tax as a deduction. Alternatively, you can deduct the sales taxes that you pay, but you can't deduct both income and sales tax.
To determine the exact amount you can deduct, you have to take your actual state and local income tax paid. However, those who claim sales tax have a choice: They can either document their spending and deduct the amount of tax paid, or they can use default tax tables that the IRS provides showing average spending and taxation based on income level and state of residence.
Why taxpayers are upset about losing the state and local tax deduction
For those who itemize, the state and local income or sales tax deduction is one of the most popular itemized deductions in the tax laws. Almost 42.7 million taxpayers claimed this deduction on their tax returns in the most recent year for which IRS data is available, and the deductions under the provision amounted to almost $353 billion. That works out to about $8,262 on average for every taxpayer claiming the deduction.
Among those who took the deduction, state and local income tax was a much bigger deal than sales tax. Only 9.6 million taxpayers elected to deduct sales taxes instead of income tax, and their average deduction was just $1,832. By contrast, the 33 million taxpayers who took income taxes as a deduction saved an average of $10,134 from the provision.
Exactly how much that costs the typical family depends on what their marginal tax rate is. Based on current tax brackets ranging from 10% to 39.6%, a deduction of $8,262 would potentially produce tax savings of between $826 and $3,272.
RELATED: Check out some of the most 'ridiculous' tax loopholes:
10 ridiculous tax loopholes
10 ridiculous tax loopholes
1. Alaskan Whaling Captain Deduction
Alaskan whaling captains can avoid tax on up to $10,000 of whaling-related expenses per year. Costs they can deduct include purchasing and maintaining the boat, weapons and gear, food and supplies for the crew, and storing and distributing the catch.
When a business pays for capital improvements — like building a new office or buying a new machine — it typically deducts those costs over the life of the asset, which could translate into decades. A special exception exists in the tax code for “certain motorsports entertainment complex property placed into service before Jan. 1, 2017,” which refers to NASCAR tracks and other racing facilities. The exception allows businesses to deduct the costs over seven years, which is much faster than usual.
(Onfokus via Getty Images)
3. Hawaii’s Exceptional Tree Deduction
If you take care of an “exceptional tree” in Hawaii, you can deduct up to $3,000 on your state taxes of what it costs you. A local county arborist advisory committee must declare it an exceptional tree and you’ll need an affidavit from the arborist stating the tree’s type and location and what you paid to maintain it. You can take this deduction only once every three years.
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4. Florida’s Rent-a-Cow Deduction
If you live in Florida and want to pay lower property taxes — perhaps on your second home that has a lot of open land — consider renting some cows. Under greenbelt laws, if you use your land for agricultural purposes, your real estate taxes are based on the agricultural value of the land, not its market value.
This deduction doesn’t explicitly state how many cows you have to raise or even that you have to own them. Developers often let a few dozen rented cows roam their land — sometimes even during construction — to lower their property tax bills.
5. New Mexico’s Centenarian Deduction
If you live to be 100 years old, moving to New Mexico will cut your tax bill because you will pay no tax to the state. A caveat: You cannot take the deduction if you claim someone as a dependent. Paying no state income tax might not be a huge break, but if it’s available, take it.
(gece33 via Getty Images)
6. Qualified Performing Artist Deduction
If you’re searching for a tax loophole you can use — one that doesn’t benefit only the 1 percent — the IRS allows qualified performing artists to deduct certain expenses. To qualify, you must have performed for at least two different employers during the year and received at least $200 from each, had business expenses that exceeded 10 percent of your performing arts income and claimed less than $16,000 in adjusted gross income for the year. If you’re married, that $16,000 limit applies to both your spouse’s and your incomes.
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7. Home Landscaping Deduction
If you regularly see clients at your home office, you might be able to write off a portion of your landscaping costs. The IRS allows a deduction for the portion of your home costs that are related to your home office, so as long as you use your home office exclusively for business, you might be able to take this one. If keeping your lawn looking good for your clients is part of the job, you’re in luck.
(Elenathewise via Getty Images)
8. Personal Pool Deduction
Install a pool for medical treatments and you could be in for a big tax break. One taxpayer suffering from emphysema and bronchitis was prescribed swimming by his doctor as part of his treatment, so he built a pool and wrote off a portion of the costs as a medical expense. He could deduct only the amount by which the installation cost exceeded the home’s increase in value, but he did get to include upkeep costs.
Deducting body oil on your taxes might sound downright crazy, but you might be able to. One professional bodybuilder needed to shine a little brighter during competition so he applied body oil. When tax season rolled around, he included the cost as a business expense. At first, the IRS disallowed the deduction, but the Tax Court approved because using the oil made him more competitive.
(bekisha via Getty Images)
10. Charity Meat Deduction
Meat packers, butchers and processing plants in South Carolina can earn a $75 state tax credit for each deer carcass they process and donate. You must be licensed with the state or the U.S. Department of Agriculture and you must have a contract with a qualified nonprofit that distributes food to the needy. If you use any of the deer for commercial purposes, you will not qualify for the donation.
Why the tax plan eliminates the state and local tax deduction
Given the widespread popularity of the state and local income or sales tax deduction, it's somewhat surprising that lawmakers would eliminate the provision. Yet to fit tax reform under budgetary limits, Congress must pay for tax cuts elsewhere by either raising taxes or eliminating existing tax breaks. As part of a package that also includes ending the deductions on real estate and personal property taxes, lawmakers estimate that taxes will rise by $1.3 trillion over the next 10 years.
Politically savvy taxpayers haven't been able to help but notice that the provision would have an outsized impact on those in states with the highest income tax rates. That list happens to include nearly all of the high-population states whose residents voted against President Donald Trump in the 2016 presidential election, including California, New York, Illinois, and New Jersey. Many lawmakers have dismissed speculation that the measure is intended to exact political revenge, but the coincidence is hard to ignore.
Watch your taxes
The tax reform proposals seek to offset the elimination of key itemized deductions by raising standard deduction amounts and providing other breaks for taxpayers. Yet for many, the loss of more than $8,000 in deductions from state and local income or sales taxes will dramatically hurt their chances of actually seeing lower taxes under the proposal. If that happens, Washington can expect a backlash from those it was seeking to help.
Generally, when you give money to a charity, you can use the amount of that donation as an itemized deduction on your tax return. However, not all charities qualify as tax-deductible organizations. While there are many types of charities, they must all meet certain criteria to be classified by the IRS as tax-deductible organizations. There are legitimate tax-deductible organizations in many popular categories, such as those listed below.
Married couples have the option to file jointly or separately on their federal income tax returns. The IRS strongly encourages most couples to file joint tax returns by extending several tax breaks to those who file together. In the vast majority of cases, it's best for married couples to file jointly, but there may be a few instances when it's better to submit separate returns.