SALT Tax: pAYING aTTENTION TO TAx law can save you thousands
In This Episode:
We stress knowing two formulas 1) Income - Expenses = Remaining Cash and 2) Assets - Debt = Net Wealth.
In our workshops, Money School Financial Course, blogs, etc... we stress that knowing about taxes is essential because its the largest item we have for expenses. Tax laws are changing constantly and don't always get press in the media. However, you need to know about them.
In this episode, we illustrate one of those tax laws that was "flying under the radar." It is the SALT Tax or the potential repeal of it.
The SALT Tax
The SALT Tax is just one example of various tax laws that "fly under the radar." It stands for state and local tax "write off".
Every year, you pay state and local taxes. You can use these taxes to deduct the overall amount of income that is taxed on a Federal level.
For example, if you make $250,000 per year and pay $30,000 in state and local taxes, then your Federal taxes are based on $220,000 of income not $30,000 (this is a simplistic way of looking at it but is good for illustrative purposes.
When President Trump came to office he passed a new tax law decreasing tax rates for what the government defines as middle class. This meant that the government would be reducing how much they would collect in taxes all else equal.
Therefore, President Trump put a cap on how much you can deduct from Federal taxes from the "SALT Tax". The new limit is $10,000 and was designed to make "Wealthy" people pay more.
Going back to our previous example, instead of writing off $30,000, you would only write off $10,000. Therefore, your Federal taxes would be based on $240,000 instead of $220,000. Therefore, the wealthy pay more in Federal taxes...
Obviously, this new section of the tax code was not popular with wealthy people. Therefore, Nancy Pelosi is currently trying to include the repeal of the SALT Tax law in the new stimulus bills going through Congress.