Join #1 A.I. tax service for freelancers

Resources

Home › Tax Tips › Salt Deduction

What Is The SALT Deduction?

As a freelancer, paying local and state taxes is unavoidable (unless you live in a state with no income tax). On the bright side, the IRS allows taxpayers to claim the state and local tax (SALT) as an itemized deduction. SALT stands for “State and Local Taxes”, and understanding how this deduction works can make a significant difference in your tax situation as a freelancer. Whether you're a seasoned freelance pro or just getting started in the world of self-employment, knowing the ins and outs of the SALT deduction can help you maximize your savings and stay in good standing with the IRS.

Table of contents

History of the SALT deduction...Read more

Why should freelancers claim the SALT deduction?...Read more

1099 tax benefits of the SALT deduction...Read more

Reducing taxable income...Read more

Gaining access to state tax credits...Read more

More retirement contributions...Read more

The pass-through entity workaround...Read more

Claiming the SALT deduction as a freelancer...Read more

History of the SALT deduction

The SALT deduction was introduced in 1913 but went through a change after 2017 – a cap was imposed. It’s currently capped at $10,000 for single filers and $5,000 for married individuals filing separately. Before the TCJA, taxpayers could write off all the state and local taxes they paid depending on their income and state. It significantly benefited individuals in high-tax states or with substantial income. In 2017, the Tax Cuts and Jobs Act was signed into law, bringing about a sweeping overhaul of the tax code. The SALT deduction cap was part of the overhaul. These limits are the same as 2023. If you’re asking yourself why there was no change in the limit to adjust for inflation and the cost of living, it’s because of the Tax Cuts and Jobs Act itself. The Act was designed to simplify the tax code and reduce federal tax revenue by providing big tax cuts. To help offset the revenue losses resulting from these cuts, Congress decided to limit the SALT deduction, effectively putting a cap on the amount of deductions individuals could claim. This cap is set to expire by 2025. This means that, unless changes are made in Congress, the SALT deduction will revert to its pre-2018 form after 2025, allowing taxpayers to deduct the full amount of their state and local taxes once again.

Why should freelancers claim the SALT deduction?

You already know that freelancers have to pay SE tax on earnings above $400. This tax includes Social Security (12.4%) and Medicare (2.9%). It is paid alongside income taxes, which include federal, state and sometimes local taxes.

Infographic entitled Types of Local Taxes listing taxes that freelancers should know when paying self-employment taxes.

If you plan to take this deduction, know you have two options. You can either deduct state and local sales taxes or state and local income taxes. Writing off state and local sales taxes means using the sales tax deduction calculator on the IRS website to find your amount. Deducting state and local income taxes includes estimated tax payments for self-employed individuals. If you also have W-2 income, you can easily calculate your deduction amount by looking at your W-2 form. Most annual taxes can be deducted for 1099 workers who own property (homes, vehicles, office buildings). Certain types of taxes are levied to improve the state and, therefore cannot be deducted. You can always get professional help from a tax pro so that you don’t deduct an expense you shouldn’t. The SALT deduction will only affect income taxes since it’s an itemized personal expense. If you're thinking about taking this deduction, you'll want to include it on Schedule A, just like your regular personal expenses. But here's the catch: you might not be able to claim the SALT deduction unless you've got a bunch of personal expenses to itemize. Freelancers looking to reduce their self-employment taxes will have to rely on deducting their business expenses instead. However, a few benefits come from claiming the SALT deduction.

1099 tax benefits of the SALT deduction

Infographic entitled Tax Benefits From The SALT Deduction listing how this deduction can benefit 1099 taxpayers.

As a freelancer, taxes can get pretty overwhelming. If you use FlyFin, you can let tax experts do all the math for you. A.I. finds tax deductions that you can claim, and CPAs provide unlimited support, whether answering tax questions or helping you with your returns.

Reducing taxable income

The best thing about the SALT deduction is that it reduces your taxable income. This is good news as it reduces the estimated taxes you have to pay. Less income means a lower tax liability, leaving more money in your pocket to for your business.

Gaining access to state tax credits

Certain states (like New York) offer tax credits to residents who pay state and local taxes. These tax credits are aimed at helping freelancers by supporting their business growth. So, along with taking the SALT deduction, these credits can be a huge tax benefit for new businesses. You’ll need to do some research into what is available to you in your state, but it’s definitely worth looking into.

More retirement contributions

A low taxable income from using the SALT deduction also means more money to invest in your retirement. Self-employed individuals can contribute to traditional IRAs, SIMPLE IRAs or even a Solo 401(k). Certain retirement contributions are also tax-deductible.

The pass-through entity workaround

C Corps have always been able to take the SALT deduction without any limits since its introduction. But from 2021, 30 states have introduced a workaround that allowed pass-through entities to do the same. It allowed S Corps, sole proprietorships, single-member LLCs and partnerships to pay taxes at the corporate level and take the SALT deduction without any limits. All they have to do is change their filing preference. Given how popular pass-through entities are with self-employed individuals, this workaround was a huge tax relief.

Infographic entitled 8 States That Implement The PTE Workaround listing states that do not limit SALT deduction for 1099 tax payers.

Claiming the SALT deduction as a freelancer

To claim the SALT deduction as a freelancer, you first need to understand your eligibility. Are you itemizing your personal expenses? If yes, then you can go ahead and take the deduction. Just as a refresher, personal expenses can include:

Medical bills (laser eye surgery, X-rays, prescription medication)
Contributions to a charity
Home mortgage interest
Dental expenses
Losses from theft

Typically, freelancers can claim this deduction by itemizing their deductions on Schedule A instead of taking the standard deduction. But you can’t take the deduction if your state and local taxes exceed the cap limit. The next step is gathering the necessary documents to claim your SALT deduction. These documents should provide evidence of the state and local taxes you've paid throughout the year. Think W-2 forms, 1099 forms and property tax receipts. Then, you have to decide whether you’re deducting state and local sales taxes or state and local income taxes. Remember that you can also include estimated taxes paid to the state and property taxes. To claim the SALT deduction, you'll need to itemize your deductions on Schedule A. This involves listing out all your deductible expenses, such as mortgage interest, medical expenses, and charitable contributions. The total of these deductions must exceed the standard deduction for itemizing to be worthwhile. The standard deduction for 2024 is:

$13,850 for single filers
$27,700 for those married, filing jointly
$13,850 for those married, filing separately
$20,800 for head of household

Apart from Schedule A, you’ll need to fill out Schedule C and Schedule SE to pay 1099 contractor taxes. You can use a 1099 tax calculator if you need help finding business deductions to lower SE tax. Claiming the SALT deduction has nothing to do with itemizing your business expenses, so you can definitely do both. Knowing how to navigate the SALT deduction as a freelancer can be confusing, but the payoff can be worth it if you do it right. While the current cap is set to expire by 2025, it could be extended or changed depending on the government. So it’s a good idea to get comfortable knowing how to use this deduction to your advantage. Asking a tax pro to help you out is always a good first step. Keeping yourself organized and up to date on tax laws is the best way to be prepared for a tax year. These deductions require good recordkeeping throughout the year, so make sure that you have a system (digital or otherwise) that works for your business.

Deductible Education Expenses 2024

Education expenses like the interest on student loans can sometimes be deducted from your taxable income, and education tax credits can lower the amount that taxpayers have to pay in taxes.