State and Local Taxes (SALT)

State and Local Taxes (SALT) are the taxes you pay to your state, county, or city government, as opposed to the federal government (Uncle Sam). Think of them as the subscription fees for living in your specific corner of the world, funding essential public services like schools, police, fire departments, road maintenance, and parks. For individuals, the most common forms of SALT are state income taxes, local property taxes on real estate, and sales taxes on goods and services you buy. For a long time, American taxpayers could deduct the full amount of their SALT payments from their federal income tax calculation, which softened the blow of living in a high-tax state. However, a major rule change in 2017 put a cap on this deduction, making SALT a much bigger factor in personal finance and investment planning for many, especially in states like California, New York, and New Jersey.

Taxes are one of the biggest drags on investment returns over a lifetime. While federal taxes get most of the attention, SALT can take a significant bite out of your income and investment gains, directly reducing the cash you have left to save, spend, or reinvest. A higher SALT burden means you need to generate higher pre-tax returns just to end up with the same amount of money in your pocket as an investor in a low-tax state. Understanding your personal SALT situation is crucial for accurately forecasting your after-tax returns, which is the only return that truly matters.

Before 2018, you could deduct all of your paid state income, sales, and property taxes from your federally taxable income. This was a huge benefit for those in high-tax states. The Tax Cuts and Jobs Act of 2017 (TCJA) threw a wrench in the works by capping the total SALT deduction at $10,000 per household, per year. For example, if you live in New Jersey and pay $15,000 in property taxes and $8,000 in state income taxes (for a total of $23,000), you can now only deduct $10,000 of it on your federal tax return. The remaining $13,000 is no longer deductible, potentially increasing your federal tax bill significantly. This change made the cost of living in certain states much higher and brought tax planning to the forefront of many investors' minds.

Being aware of your SALT environment can help you make smarter financial choices.

• Location, Location, Taxation: The SALT cap has accelerated a trend of people and businesses moving from high-tax states (like California, New York) to states with low or no state income tax (like Florida, Texas, and Nevada). This migration can affect regional economies, job growth, and real estate prices, creating potential investment opportunities and risks in both the places being left and the places being settled.
• Tax-Smart Investing: When your state tax rate is high, using tax-advantaged accounts becomes even more powerful.
  1. Retirement Accounts: Maxing out contributions to accounts like a 401(k) or a traditional IRA allows your investments to grow tax-deferred. You don't pay federal or state income tax on that money until you withdraw it in retirement, which is a massive long-term advantage.
  2. Municipal Bonds: This is where SALT-aware investing really shines. A municipal bond (or “muni”) is a loan you make to a state or city. The interest income you receive is typically exempt from federal income tax. Better yet, if you buy a muni issued by your own state or city, the interest is often “triple-tax-free”—exempt from federal, state, and local taxes. For a high-income earner in a high-tax city like New York, this can be a much better deal than a corporate bond with a higher interest rate.

A savvy value investor views taxes as an unavoidable business expense that must be managed, not an emotional trigger that dictates every move. The goal isn't to pay zero tax; it's to maximize long-term, after-tax wealth. The core of value investing remains unchanged: find wonderful businesses trading below their intrinsic value. A great company is a great company, regardless of whether it's headquartered in high-tax San Francisco or no-tax Austin. Your primary focus should always be on the quality of the business and the margin of safety in your purchase price. However, being tax-aware is part of being a sophisticated investor. When evaluating an investment, you must factor in the tax implications to understand your true potential return. The key is to not let the “tax tail wag the investment dog.” Don't buy an inferior investment just for a tax break, and don't avoid a superior one just because it comes with a tax bill. Do the math, understand the net impact on your returns, and always let value, not taxes, be your ultimate guide.