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New Deduction Limits on Massachusetts State Taxes

Some individuals and families won’t feel the full impact of the cap with the 2018 tax filing, as they knew about this change and prepaid a significant portion of their 2018 real estate taxes in 2017.

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Some individuals and families won’t feel the full impact of the cap with the 2018 tax filing, as they knew about this change and prepaid a significant portion of their 2018 real estate taxes in 2017.

One of the changes in the tax law for the 2018 tax filing season that is disproportionately affecting residents of Massachusetts and other traditional high-state-income-tax/high-property-tax states (such as New York, Connecticut and California) is the limitation on state tax deductions.

Previously, individuals were able to deduct an unlimited amount of state-related taxes – including state taxes paid and reported on a W-2, personal property taxes (such as automobile excise taxes), and real estate taxes. As an example, if a Massachusetts resident paid $12,000 in state taxes, $2,000 in personal property taxes, and $10,000 in real estate taxes, that individual could, prior to 2018, deduct $24,000. This year, that same individual’s deduction will be capped at $10,000.

For higher earners in particular, this deduction cap hits hard. A filer who earns $500,000 in wages will have paid approximately $25,000 in state taxes, which is already two-and-a-half times over the limit. In states where salaries and property values are traditionally lower, though, this new change will affect not nearly the same number of people.

It is important to note that income-producing property is excluded from this cap, so real estate taxes paid on a rental property can still be deducted, separate from the $10,000 cap. However, real estate taxes on a second home or other non-income-producing property would be included in the $10,000 limit.

Of course, some individuals and families won’t feel the full impact of the cap with the 2018 tax filing, as they knew about this change and prepaid a significant portion of their 2018 real estate taxes in 2017. As mentioned above, this change is impactful in the high-income/high-property tax states, so expect to hear more about it as awareness of deduction limitations increases– especially in Massachusetts.

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

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