State and Local Taxes—Changing Limitations into Opportunities

The recently passed Tax Cuts and Jobs Act (TCJA) limits certain deductions, but there’s a way to transform limitations into opportunities that make a lasting difference.

By now you know that the TCJA places a limitation on the deduction for taxes paid at the state and local level. Beginning in 2018, the aggregate deduction is limited to $10,000 ($5,000 married filing separately). This includes state and local income taxes, real estate property taxes, car tag taxes, and sales taxes.

Alabama taxpayers who expect to itemize deductions in 2018 but will exceed the limit for state and local taxes might want to consider an alternative in order to receive a deduction for the anticipated amount over $10,000.

The Alabama Accountability Act (AAA) provides scholarships for students to cover the costs of attending a better school.  Students can apply for scholarships from one of the scholarship granting organizations (SGOs).

When an individual or corporation donates to an SGO, they receive a state tax credit—just like paying a tax estimate.  For federal taxes, the donation is treated as a charitable contribution, therefore sidestepping the $10,000 limitation on state and local income taxes. For individuals, the tax credit for a donation to an SGO is limited to 50% of state taxes owed with an overall limit of $50,000.

It’s important to know that the annual cumulative cap on donations for all taxpayers statewide is $30 million. For 2018, we believe Alabama taxpayers will act quickly and the cap will be reached in record time.

Please give us a call if you would like to discuss this or any questions you might have regarding the new tax laws.