Tax Cuts & Jobs Act Limits SALT Deductions

The Tax Cuts and Jobs Act of 2017 (TCJA) put a $10,000 limit on state and local tax (SALT) deductions for federal itemized deductions. This limit sunsets at the end of 2025.

For example, under the TCJA, if you paid $30,000 in state tax, you would get a personal itemized deduction of $10,000 and forfeit the other $20,000, thereby increasing your tax liability. This increase in tax is more than you would have owed before the TCJA was enacted, where you would’ve been able to deduct the full $30,000.

Kansas Moves to Bridge the Gap

Kansas has found a workaround for this missed deduction for individuals who are partners in a partnership or shareholders in an S corporation. Under the new Kansas SALT Parity Act, your partnership or S-corp pass-through K-1 income can be taxed for Kansas purposes at the entity level starting with 2022 income. Your partnership or S-corp can make an annual election to pay your portion of the Kansas tax at the entity level. Your entity is allowed a full unlimited state tax deduction thereby reducing the portion of the pass-through income on which you must report and pay federal tax.

After making the annual election, it is binding on all individual partners and shareholders. Estimated tax payments on that pass-through income are paid by the partnership or S-corp and not the individual(s). Any entity level credits, net operating loss (NOL) or tax credits stay with the electing pass-through entity and are not passed to the partners or shareholders. Non-resident individuals whose only Kansas income is from an electing pass-through will no longer need to file a Kansas individual return.

From a state perspective, you pay the same amount of tax through the pass-through entity that you would have on your personal Kansas return. The savings comes on the federal side, as the deduction for state tax is limited at the personal level but is unlimited at the pass-through level.

An Example of the Kansas SALT Parity Act in Action

Let’s say your portion of a partnership’s income was $100,000, and your portion of Kansas tax on that income was $5,700 (5.7%). Instead of paying federal tax on $100,000 of income, you will be paying federal tax on $94,300 ($100,000 – $5,700) of income. That minor change of paying your Kansas tax through your pass-through entity instead of paying it personally saved you and your pass-through $1,254 in cash. That is cash savings for any partner or shareholder in Kansas where the partnership or S-corp has taxable income. This Kansas law is currently set to expire when the TCJA expires at the end of 2025.

The SALT Parity Act was signed into law on April 25, 2022. Kansas will be codifying the new law in their regulations and developing the updated tax forms soon. Stay tuned for additional guidance. In the meantime, feel free to contact your Adams Brown advisor with any questions or to learn more.