How Do State and Local Income Tax (SALT) Deductions Work?
For those without an accountant or a tax attorney in the family, filing taxes can be described as a confusing and stressful process at best. But there are ways to lessen the burden — if you know where to look.
North Carolina does not currently offer a state income tax deduction for contributions to an NC 529 Account. However, the earnings grow free from state and federal taxes, which is a bonus in the long run. To take advantage of as many tax breaks as you’re entitled to, North Carolina residents who are saving for college may want to understand additional forms of tax relief.
One advantage available to taxpayers is the state and local income tax deduction, commonly referred to as a SALT deduction. Depending on your financial situation, the SALT deduction could help tremendously. For others, it may not be available or worth the effort.
Let’s break down this specific aspect of the tax code to see whether you and your family could benefit.
How Do SALT Deductions Work?
At its core, the SALT deduction allows the annual amount that taxpayers pay in state and local taxes, as well as property taxes, to be deducted from their income taxes. Currently, the maximum SALT deduction for most tax filers is $10,000.
The key purpose of the SALT deduction is to help taxpayers avoid paying federal taxes on money that has already been taxed by state or local governments. Before 2018, there was no cap on SALT deductions. Unless Congress votes to eliminate or change the SALT deduction cap, it’s scheduled to expire after 2025.
To claim the SALT deduction, you’ll need to itemize all your deductions on your tax return. The amount of your state and local income tax deduction (up to $10,000) goes in the line called “state and local taxes.” Additional deductions you can claim when itemizing include large out-of-pocket medical expenses, interest paid on a home mortgage, and donations to charity.
When filing your taxes, you have the choice to itemize your deductions or claim the standard deduction. Let’s take a closer look at the standard deduction and which one may be right for your financial situation.
How Do I Know if I Qualify for a SALT Deduction?
In 2023, the standard deduction in North Carolina for most people who are single or married filing separately is $10,750 ($21,500 for those who are married filing jointly).
So, if you are single, you will need to have at least another $750 of itemized deductions, beyond the SALT deduction of $10,000, for it to be worth your time and effort to itemize instead of claiming the standard deduction of $10,750. For married couples who would need to itemize more than $21,500 in deductions, it may be worth your time to take the standard deduction.
In fact, most taxpayers only qualify for the standard deduction because it amounts to more than their itemized deductions. Consult a financial advisor to determine whether itemizing or claiming the standard deduction is right for your financial situation.
Tax Advantages for Education Accounts
Another advantage to the current tax laws involves saving for your child’s education. 529 plans are tax-advantaged accounts created to help parents and families save for their children’s education.
The major tax benefit of 529 accounts, including North Carolina’s NC 529 Plan, is that the earnings grow tax-free if the money is used to pay for eligible education expenses. These include college expenses, K–12 tuition, student loan payments, apprenticeship programs, and more.
Open an account and start saving today with a minimum contribution of $25 so you can take advantage of the tax benefits and be ready when it’s time for your child to head off to college.