by Justin M. Kennedy
Litherland, Kennedy & Associates, APC, Attorneys at Law
As we start a new tax year, it may be time to revisit some of the provisions of the Tax Cuts and Jobs Act, which increased the standard deduction to $12,000 per person or $24,000 per married couple. For those who do not itemize their deductions, this may be great news. However, for those who do itemize, there may be some significant tax consequences in the new law. The new law included a deduction cap of ten thousand dollars ($10,000) for State and Local Taxes (“SALT”), this includes California income taxes and real property taxes. Whether you are single or married, the SALT deduction cap of $10,000 applies (this means married couples have an effective per person $5,000 cap on SALT, whereas a single person would qualify for $10,000).
One strategy to help avoid the $10,000 deduction cap on SALT is to use a Non-Grantor Trust. A Trust may be taxed as either a Grantor Trust (uses the creator’s social security number as the tax identification number) or a Non-Grantor Trust (uses a separate tax identification number). Income generated in a Grantor Trust will be reported on the creator’s tax return and will be subject to the creator’s $10,000 SALT deduction cap. Whereas, a Non-Grantor Trust is a separate tax entity, and would have a separate $10,000 SALT deduction cap.
If you transfer assets to a Non-Grantor Trust, any California income taxes or real property taxes incurred by those assets would be report against the Non-Grantor Trust’s separate $10,000 SALT deduction cap.
Henry owns two real properties, his home and a rental. He has his home held in his Grantor Trust and Henry deducts his California income taxes and his home’s property taxes against his personal $10,000 SALT deduction cap. Henry transferred the rental property into a Non-Grantor Trust, the taxes on the rental’s income and the rental’s property taxes may be deducted against the Non-Grantor Trust’s separate $10,000 SALT deduction cap. This strategy allows Henry to deduct up to $20,000 of State and Local Taxes.
[IRS CIRCULAR 230 NOTICE: Any tax advice contained herein is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. If you would like to receive written advice in a format that complies with IRS rules and that may be relied upon to avoid penalties, please contact the author.]
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