I wanted to give you a quick heads up on some interesting developments with regard to the “SALT” (State and Local Income Taxes) $10,000 limitation on Schedule A.
As you know, this limitation on deducting State and Local Income Taxes created a rather large increase for higher income clients in higher tax states.
Many higher income clients went from deducting, say, $80,000 to deducting $10,000, which obviously increased their tax liabilities substantially.
New for tax year 2021, some states have found a “creative” way to avoid the SALT limitations on Schedule A.
It’s called the “Pass Through Entity” (PTE) Tax.
Long story short, this new tax allows a pass through entity (S corporation or partnership, mainly) to “elect” to pay the Pass Through Entity Tax on its earnings, before those earnings are passed through to the shareholders or partners.
The company will then deduct that PTE tax on the company tax return, reducing the amount of income that flows through to the shareholders / partners.
It’s a truly “sneaky” way of “getting around” the SALT limitation on Schedule A.
Maybe these politicians are not as dumb as they look??? 🙂
I ran a quick analysis for a few of our S corp clients that get hit hard by the SALT limits and looks like this new PTE could save those clients $20,000+ per year in taxes.
There are a couple “catches” to taking advantage of this new PTE “method,” which we can’t get into right now; for now, I’m just giving you a “heads up” about this new option. Especially if you are doing any tax planning for higher income clients in higher tax states, this new option may be highly appealing!
These and many more updates are all included in our tax update & refresher courses.
Also, will be hosting some live Q & A sessions about all the new tax year 2021 tax changes. These live Q &Q sessions will be exclusively for Members who choose the “Forever Edition” of one our tax update & refresher courses. Forever Edition Members, because they are the rock upon which Pronto Tax School is built, also get lower pricing and many other exclusive “goodies.” If you would like to upgrade your account to the “Forever Edition,” please contact our support team at firstname.lastname@example.org.