schema: | { “@context”: “https://schema.org”, “@graph”: [ { “@type”: “Article”, “headline”: “State and Local Tax (SALT) Planning Guide: Deductions, Credits, Pass-Through Structures, and Multi-State Strategy (2024-2026)”, “description”: “Comprehensive SALT planning guide covering state income taxes, SALT deduction limits, pass-through taxation, economic nexus, apportionment, credits, and strategic planning for federal/state tax efficiency.”, “image”: “https://bato.com.np/assets/images/salt-tax-planning.jpg”, “datePublished”: “2024-08-15”, “dateModified”: “2026-02-21”, “author”: { “@type”: “Person”, “name”: “Robert Klein” }, “publisher”: { “@type”: “Organization”, “name”: “BATO - Business Audit & Tax Organization”, “logo”: { “@type”: “ImageObject”, “url”: “https://bato.com.np/assets/images/logo.png” } } } ] }

State and local taxes represent significant burden for individuals and businesses. This comprehensive guide covers SALT deductions, credits, multi-state planning, and optimization strategies.

State and Local Taxes Overview

What is SALT?

Definition and Components:

SALT = State and Local Taxes
Includes:
✓ State income taxes (corporate and individual)
✓ Local income taxes (city, county, municipal)
✓ State and local sales taxes (on purchases)
✓ Property taxes (real, personal)
✓ Excise taxes (specific products)
✓ Business licensing fees (often tax-like)

NOT included in SALT (federal taxes):
✗ Federal income taxes
✗ Federal payroll taxes (Social Security, Medicare)
✗ Federal excise taxes (on gasoline, etc.)
✗ Federal estate taxes

Typical SALT burden (varies by state):
- Low SALT states (TX, FL, WA): 2-5% of income
- Medium SALT states (NY, CA, IL): 8-12% of income
- High SALT states (CA, NJ, NY if wealthy): 12-15%+ of income

Examples of SALT by state:

California (Highest in nation):
- State income tax: 1%-13.3% (top rate)
- Sales tax: 7.25%-8.75% (combined state/local)
- Property tax: ~0.72% (Prop 13 limited)
- Combined: Effective 10-15% for high earners

Texas (No state income tax):
- No state income tax (0%)
- Local sales tax: 6.25%-8.25%
- Property tax: ~1.8% (higher to compensate)
- Combined: 8-10% on purchases/property

Florida (No state income tax):
- No state income tax (competitive advantage)
- Sales tax: 6%-7.5%
- Property tax: 0.83% average
- Specific for wealthy: Estate planning benefit

New York (High earners targeted):
- State income tax: Up to 10.9% (plus surcharge 3.876% >$1M)
- City income tax: 3.876% (NYC)
- Sales tax: 8.875% (NYC)
- Combined for NYC resident >$1M: 18.75% on income

Federal SALT Deduction Limitation (TCJA 2017)

The $10,000 Cap:

Tax Cuts and Jobs Act (2017) Limited SALT deduction:

New rule: SALT deduction capped at $10,000 per return

Applies to:
✓ Individuals (personal tax returns)
✓ Married filing jointly filers
✓ Married filing separately filers (max $5,000 each)

States/locations eliminated entirely:
✗ Does NOT apply to corporations (C-corps can deduct all)
✗ Does NOT apply to pass-throughs if they use pass-through
  entity tax election (might be available)

Example impact:

High-earner in California:
- Income: $500,000
- State income tax: $50,000 (10%)
- Property taxes: $30,000
- Total SALT: $80,000
- Federal deduction allowed: $10,000 only
- Non-deductible SALT: $70,000

Tax cost:
- If could deduct all: $80,000 × 37% = $29,600 federal benefit
- With $10,000 cap: $10,000 × 37% = $3,700 federal benefit
- Lost benefit: $25,900 annually

10-year impact (2017-2026): $259,000+ in lost deductions

Sunset Provision:
- Current law: Deduction limited through 2025
- After 12/31/2025: Deduction reverts to unlimited (if not extended)
- Status: Often extended in tax bills
- Planning: 2025-2026 may provide planning opportunities
  if reversion occurs

SALT Deduction Strategies:

Strategy 1: Accelerate State Tax Payments
- Pay state estimate in December (not January)
- Brings deduction into current year
- Example:
  Year 1: Pay Q1, Q2, Q3 + double Q4 (annual + partial next year)
  Deduction Year 1: $10,000 (maximum cap)
  Year 2: Only 3 quarter payments
  Years alternate to maximize deduction timing

Limitation: States may have rules against accelerating
(some states deny if "improper acceleration" for tax purposes)

Strategy 2: Make Property Tax Escrow Payment
- If mortgage has escrow account
- Pay annual property tax early or request payment
- Brings forward to current year
- Deductible in year paid (if accrual basis)

Strategy 3: Shift to State Pass-Through Entity Tax (PTET)
- Available in some states (CA, NY, IL, others)
- Company pays state tax (deductible at entity level)
- Owners claim federal credit for pass-through entity tax
- May bypass individual SALT cap

Strategy 4: Charitable Contribution Strategy
- Donate appreciated property (not cash) to charity
- State makes contribution, claiming income deduction
- Only works in certain circumstances
- Limited applicability

Strategy 5: QBI Deduction (Qualified Business Income)
- 20% deduction on business income
- Available to pass-through entities
- Can offset some SALT limitation impact
- Generally available; rules complex

Strategy 6: Multi-State Apportionment
- Allocate income to low-tax states
- Reduce income subject to high-tax state
- Creates multi-state filing complexity
- May trigger audit/scrutiny

State Income Tax Analysis

State Tax Rates and Structures

Comparison of Major States (2024-2025):

No State Income Tax (9 states):
- Alaska: 0% state tax
- Florida: 0% state tax
- Nevada: 0% state tax
- South Dakota: 0% state tax
- Tennessee: 0% tax (limited on interest/dividends)
- Texas: 0% state tax
- Washington: 0% state tax
- Wyoming: 0% state tax
- New Hampshire: 0% tax (on income; 5% dividend/interest)

Low State Income Tax (1-3%):
- Colorado: 4.4%
- Illinois: 4.95%
- Indiana: 3.15%
- Kentucky: 2-5%
- Louisiana: 2-6%
- Mississippi: 0-5%

Moderate State Income Tax (5-8%):
- California: 1-9.3% (plus 1-3.876% surcharge on >$250K)
- Georgia: 5.75%
- Maryland: 5.75%
- Massachusetts: 5%
- Michigan: 4.25%
- New Jersey: 1.4-10.75%
- New York: 4-8.82% (plus NYC 3.876%)
- North Carolina: 4.99%
- Ohio: 0-5.75%
- Pennsylvania: 3.07%
- Virginia: 2-5.75%

High State Income Tax (8%+):
- Arkansas: 0-5.975%
- California: 1-13.3% (top rate with surcharges)
- Connecticut: 3-6.99%
- Delaware: 0-6.6%
- Hawaii: 1.4-11%
- Iowa: 0.33-8.53%
- Kansas: 5.7-5.9%
- Maine: 5.8-7.15%
- Minnesota: 5.35-9.85%
- Missouri: 1.5-5.3%
- Montana: 1-6.9%
- Nebraska: 2.84-6.84%
- New Mexico: 1-5.9%
- North Dakota: 1-5.54%
- Oklahoma: 0.5-5.75%
- Oregon: 4.75-9.9%
- Rhode Island: 3.75-5.99%
- Vermont: 3.55-8.75%
- West Virginia: 3-6.5%
- Wisconsin: 3.54-7.65%

Planning consideration:
High-earner relocation from CA to TX:
- California: 13.3% marginal rate
- Texas: 0% state tax
- Annual savings on $1M income: $133,000
- 5-year relocation: $665,000 tax savings

Pass-Through Entity Taxation

C-Corporations vs. Pass-Throughs:

C-Corporations:
- Entity-level tax: Federal (21%) + State (varies 0-12%)
- Distribution tax: Dividend tax (federal 20%, state ~5-10%)
- Double taxation: Entity tax + shareholder tax
- Example: $100 profit = $21 federal + $5 state = $74 left
           Then $74 dividend × 20% = $14.80 federal tax
           Total: $39.80 tax on $100 profit (39.8% effective)

Pass-Through Entities (S-Corp, LLC, Partnership):
- No entity-level tax
- Income flows to owner
- Owner pays tax at individual rates
- Single taxation
- Example: $100 profit flows to owner
          Owner pays federal (37%) + state (10%) = 47% tax
          Total: $47 tax on $100 profit (47% effective)

State Pass-Through Entity Tax (PTET):
- TCJA created incentive to use pass-throughs
- States losing tax revenue from pass-throughs
- Created PTET to tax entity-level (vs. individual level)
- Can recapture lost state revenue

PTET States (with elections):

California (Top-Heavy PTET):
- Entity elects to pay state tax (on entity, not owner)
- Tax rate: 13.3% (same as individual rate)
- Owner claims federal credit (against federal tax owed)
- Benefit: Bypasses SALT cap (if properly structured)
- Requirement: Entity must elect

New York:
- PTET at entity level
- Rate: 7.25%
- Federal credit available (dollar-for-dollar)
- Benefit: State tax avoids individual SALT cap

Illinois:
- PTET at 7.75%
- Similar benefit structure

Texas (No PTET):
- Cannot do PTET (no state income tax)
- Pass-through advantages maximized (0% state)

Strategy using PTET:

Example: $1M business income in California

Scenario 1: No PTET election
- Income taxable to owner at 13.3% state rate
- Federal tax: $37% of $1M = $370K
- State tax: $133K (deductible at federal if under cap)
- Total fed/state: $503K
- SALT cap impact: May lose part of deduction

Scenario 2: With PTET election
- Entity pays 13.3% state tax: $133K
- Owner pays federal: 37% × $867K = $321K
- Owner claims federal credit: (portion of $133K)
- Potential federal savings if credit full value
- Bypass of SALT cap possible
- Total may be lower if credit beneficial

Multi-State Apportionment

Determining State Tax Liability:

Apportionment: Dividing income between states where business operates

Jurisdictions may claim tax on:
- Sales made in state
- Income earned in state
- Property located in state
- Payroll wages paid in state

Apportionment formulas vary by state:

Sales-Only Formula (Preferred):
- Only sales factor apportions income
- Formula: Sales in State / Total Sales = % of income taxed
- Example:
  Total profits: $10M
  Sales in NY: $2M
  Total sales: $10M
  NY apportionment: $2M / $10M = 20%
  NY taxable income: $10M × 20% = $2M

Equally Weighted Formula (Three-Factor):
- 1/3 Sales + 1/3 Payroll + 1/3 Property
- Used by older/traditional states
- Higher tax on companies with operations/payroll in state

Factor Definitions:

Sales Factor:
- Gross receipts from sales
- Service revenue
- Objective measure typically
- Determines what % of income from that state

Payroll Factor:
- Wages paid in state
- Attracts tax if payroll concentrated in state
- Can increase state tax if significant payroll

Property Factor:
- Tangible property in state
- Home office, equipment, inventory
- Real estate owned in state
- High property = higher tax

Example Multi-State Apportionment:

Corporation with operations in 3 states:

Total Income: $10M
NY Operations:
- Revenue: $6M (60% of total)
- Payroll: $2M (50% of total)
- Property: $1M (40% of total)

CA Operations:
- Revenue: $3M (30% of total)
- Payroll: $1.5M (30% of total)
- Property: $0.5M (10% of total)

TX Operations:
- Revenue: $1M (10% of total)
- Payroll: $0.5M (20% of total)
- Property: $1M (50% of total)

If using Sales-Only Formula:
- NY: $10M × (60%) = $6M apportioned income (NY rate ~6.5% = $390K)
- CA: $10M × (30%) = $3M apportioned income (CA rate ~8.84% = $265K)
- TX: $10M × (10%) = $1M apportioned income (TX rate 0% = $0)
- Total state tax: $655K

If using Three-Factor Formula (NY example):
- Sales factor: 60% (Revenue in state)
- Payroll factor: 50% (Wages in state)
- Property factor: 40% (Property in state)
- Average: (60% + 50% + 40%) / 3 = 50%
- Apportioned to NY: $10M × 50% = $5M
- Tax: $5M × 6.5% = $325K (to NY alone)
- CA and TX similar calculation
- Total state tax: Likely higher under three-factor

Tax Planning Implication:
- States encouraging sales-only formula (competitive)
- Eliminates payroll/property factors reducing tax
- Moving payroll/property NOT taxed under sales-only
- But sales anywhere in state = apportioned

Credits and Incentives

State Tax Credits

Common State Credits:

Research and Development Credit (Each state):
- Varies by state: 5-20% of R&D expenses
- Requires qualification (can vary by state)
- Significant savings for tech/manufacturing

Example:
Company with $5M R&D spending
State credit rate: 10%
Credit value: $500,000 (potentially)

Wage-Based Credits:
- Credits for hiring in certain areas
- Hiring disadvantaged workers
- Examples: Earned Income Tax Credit (various states), New Jobs Credit

Investment Credits:
- Incentives for business expansion
- New plant/equipment in state
- Job creation thresholds
- Examples: Job Creation Fund (various states)

Economic Development Incentives:
- Tax holiday periods (new businesses)
- Property tax exemptions
- Sales tax abatement
- Varies significantly by location

Renewable Energy Credits:
- Solar, wind, geothermal incentives
- Tax credits for installation
- Growing in many states

Opportunity Zone Credits (Federal/State):
- Federal incentive for investment
- Long-term capital gains deferral
- Some states provide additional state credits

Claim Process:
- Documentation of expenditures
- Application to state (may be complex)
- Approval timeline (months typical)
- Ongoing compliance/verification
- Annual reporting requirements (sometimes)

Synergy Example:
Tech company qualifying for multiple credits:
- R&D credit: $500K (10% of $5M spending)
- Jobs credit: $200K (50 new jobs × $4K credit)
- Investment credit: $100K (qualified equipment)
- Total potential: $800K in credits
- Reduces state tax owed by ~$800K (if liability permits)

Nexus and Economic Presence

Determining State Tax Obligations:

Nexus = Business connection creating tax obligation

Physical Nexus (Traditional):
- Store or office in state
- Warehouse or inventory in state
- Employees in state
- Agent acting on behalf in state

Example:
Company with warehouse in NY
Result: Must register and file NY taxes (clear nexus)

Economic Nexus (Post-Wayfair 2018):
- Sales or revenue threshold
- South Dakota v. Wayfair (2018 Supreme Court case)
- Changed long-standing rule

Prior rule (pre-2018):
- Remote sellers (online) could avoid state tax
- No physical presence = no obligation
- Created incentive to sell remotely

New rule (post-2018):
- Economic threshold triggers states
- If revenue >$100K-$500K in state = nexus
- Even without physical presence

State Economic Nexus Thresholds (2024):

$100K threshold:
- Colorado: $100K in Colorado
- Connecticut: $100K in state
- Florida: $100K in state
- Georgia: $100K in state

$250K threshold:
- Illinois: $250K in state
- Idaho: $250K in state

$300K threshold:
- Nebraska: $300K in state

$500K threshold:
- Most remaining states

Consequences of Nexus:
- Must register with state
- File state returns
- Pay state income/franchise tax
- Subject to state audit

Web-Based Business Example:
Software company in Texas (no state income tax):
- Sells to customers nationwide (remotely)
- Annual revenue from California customers: $400K
- California economic nexus threshold: $100K
- Result: Must register, file CA return, pay CA tax
- Even though no office/employees in CA
- Exposure: Back taxes if didn't register

Multi-State Planning Strategies

Residency and Domicile Planning

Individual Taxpayer Considerations:

Domicile determination critical for individuals:
- High-tax state (CA) may claim you're domiciled there
- If successful: Can tax all your income (world-wide)
- Even if you moved to low-tax state
- Requires careful planning

Domicile Factors:
- Where you spend most time
- Business location
- Home location
- Family connections
- Voter registration
- Driver's license
- Professional licenses
- Social ties

Example Aggressive State Position:

Executive moves from CA to TX:
- Purchased home in Texas
- Changed driver's license to Texas
- Registered to vote in Texas
- Moved family to Texas
- Still has elderly parents in CA (visits monthly)
- Still has investment property in CA
- Former professional colleagues in CA

California Position:
"Your domicile is still California because:
- You visit CA monthly (family)
- You own CA property (investment)
- Your former business is in CA"

Texas Position:
"Your domicile is Texas because:
- You live in Texas full-time
- Home is primary residence
- Driver's license, voter registration in TX"

Result: Potential dispute (litigation cost $100K+)

Prudent Planning for Relocation:

1. Establish clear Texas domicile
   - Purchase primary home
   - Change driver's license, voter registration
   - Get Texas professional licenses if applicable
   - Join Texas civic organizations

2. Liquidate ties to California
   - Sell California investment property (if possible)
   - Or formally lease to third party (documented)
   - Limit visits to California (quarterly not monthly)

3. Documentation
   - Contemporaneous records
   - Move-out documents
   - Lease/purchase documents
   - Calendar of time spent in each state

4. Professional advice
   - Consider tax attorney review
   - Consider CPA letter supporting position
   - May help if challenged

Dual Domicile Risk:
- Both states may claim domicile
- Result: Pay taxes to both
- Years of litigation/settlement typical

Preventive approach:
- Make clean break with high-tax state
- Establish clear domicile in new state
- Limit visits and connections
- Consider waiting 2 years before major moves (shows intent)

Business Relocation and Restructuring

Entity Restructuring for SALT Optimization:

Strategy 1: Shift to Lower-Tax State

Current Structure:
- Operating company in California
- Owner pays California tax on all income
- Tax burden: ~13% state + ~37% federal = 50%

New Structure:
- Holding company in Texas (pass-through)
- Operating company in Texas
- Minimal California operations
- Cost: $10K restructuring + annual complexity
- Benefit: 13% annual state tax savings
- Payback: < 1 year

Complications:
- Existing contracts require assignment (complicated)
- Customer relationships in CA (nexus issues)
- Employees in CA (must consider)
- Franchise taxes may apply even if moved

Strategy 2: Related-Party Allocation

Current Structure:
- All operations in high-tax state (NY)
- Operating at high margin

Restructured:
- IP holding company in low-tax state
- Operations company buys license from IP company
- Profit shifted to lower-tax IP company
- Requires arm's-length transfer pricing

Example:
Operations company in NY: $10M revenue, $8M expenses = $2M profit
Tax: $2M × 10% (federal) = $200K federal
     $2M × 8% (NY state) = $160K state
Total: $360K tax

Restructured:
Operations company in NY: $10M revenue, $8M expenses, $1M royalty = $1M profit
Tax: $1M × 18% (fed + state) = $180K

IP company in TX: $1M royalty income (no TX state tax)
Tax: $1M × 37% federal = $370K

Total after restructuring: $550K (WORSE!)

Why restructuring didn't work:
- Federal tax burden higher than state savings
- Only works if low federal rate offset (unlikely)
- IRS scrutiny on aggressive allocations

Better use case:
Technology company with substantial IP:
- IP location optimization
- Substantial economics justify allocation
- Patent/trademark defensible
- Savings material enough to justify

Remote Work and Payroll Sourcing

Post-COVID Work Location Changes:

Pre-Pandemic Employee Tax Sourcing:
- Salary sourced where employee works
- If worked in NY: NY taxed the income
- Simple allocation

Post-Pandemic Remote Work:
- Employee works from multiple locations
- Home office in low-tax state, office visits high-tax state
- Questions how to allocate income

Multi-State Sourcing Approaches:

Approach 1: Where Work Performed (Most Common)
- Salary apportioned to each state based on workdays
- If 60% days in TX, 40% days in NY:
  - TX: 60% of salary (not taxed)
  - NY: 40% of salary (NY taxed)

Approach 2: Where Employee Directed/Control
- Sourced to location of employer direction
- NY-based company directs work
- Result: All salary to NY (even if worked remotely from CA)

Approach 3: Multi-Factor Analysis
- Where duties performed
- Where direction given
- Where compensation paid
- Where employee resident

Example Application:

Executive earning $500K:
- Employer in New York (NY office)
- Works 200 days at NY office (40%)
- Works 150 days at home office in Florida (30%)
- Works 150 days at client site in California (30%)

Sourcing:
- NY: $500K × 40% = $200K (NY tax rate 8.82% = $17,640)
- FL: $500K × 30% = $150K (0% tax = $0)
- CA: $500K × 30% = $150K (CA tax rate ~9.3% = $13,950)
- Total state tax: $31,590

If all sourced to NY (if company has control):
- NY: $500K (8.82% = $44,100)
- Total state tax: $44,100
- Difference: $12,510 (26% savings)

Planning Opportunity:
- Establish company control from remote location (tricky)
- May have employees direct work from low-tax office
- If defensible: Significant savings

Audit Risk:
- IF working primarily in high-tax state but claiming otherwise = RED FLAG
- IRS/State track:
  - IP address of computer (shows location)
  - Zoom meetings (calendar shows location)
  - Text messages showing location
  - Email metadata
- Aggressive sourcing = High audit risk

Conclusion

SALT planning is increasingly important as federal SALT deduction remains limited. Success requires:

Critical SALT Planning Factors:

  1. Understand SALT Burden
    • Calculate effective SALT rate for your situation
    • Identify highest-burden taxes (income vs. property vs. sales)
    • Project 5-year SALT burden
  2. Federal/State Coordination
    • SALT deduction $10,000 cap impact
    • Consider pass-through entity tax elections
    • Evaluate C-corp vs. S-corp tradeoffs
    • Factor federal rates (federal tax affected by SALT deductions)
  3. Nexus Management
    • Understand where tax nexus exists
    • Evaluate economic nexus exposure
    • Plan business structure accordingly
    • Remote work tax sourcing critical
  4. Apportionment Optimization
    • Focus on states with favorable apportionment formulas
    • Sales-only apportionment preferred
    • Evaluate multi-state operations impact
    • Track apportionment factor changes
  5. Credit Opportunities
    • Research and development credits
    • Job creation incentives
    • Investment credits
    • Renewable energy credits
    • Claim aggressively (if defensible)
  6. Entity Structuring
    • Choose entity type (C-corp, S-corp, LLC, Partnership)
    • Consider pass-through entity tax elections
    • Balance federal and state implications
    • Re-evaluate structure annually
  7. Relocation Planning (If Considering)
    • Clear establishment of new domicile
    • Documentation of intent (not just residency)
    • Liquidation of old-state ties
    • Professional guidance critical
    • 2+ year transition period prudent

Looking Forward (2024-2026):

  • SALT deduction cap expires 12/31/2025 (may revert to unlimited)
  • If reverts: Change entire state tax strategy (deduction more valuable)
  • New states continuing to adopt economic nexus rules
  • PTET elections becoming more common
  • Federal tax reform possible (SALT implications)
  • Remote work tax allocation still evolving
  • Interstate income sourcing rules in flux

Final Recommendation:

SALT planning should be part of integrated federal/state tax strategy. The complexity of multi-state operations and evolving nexus rules requires professional guidance. A coordinated approach considering federal, state, and local obligations yields the best results. Companies should revisit SALT strategy annually as operations change and tax law evolves.

Resources

  • State Tax Forms/Guidance: Individual state revenue department websites
  • Multistate Tax Commission: mtc.gov (apportionment guidance, tax uniformity)
  • Federation of Tax Administrators: taxadmin.org (state tax information)
  • SALT Specialists: State tax attorneys, CPA firms with SALT emphasis
  • Professional Organizations: American Institute of CPAs (AICPA), Association of International Certified Professional Accountants (AICPA)
  • News and Updates: State tax websites, tax publications (such as state bar journals)
  • Software: Multi-state tax compliance software (various vendors)
  • Legal Resources: Multi-state tax attorneys, nexus specialists, apportionment experts