IRS Proposed SALT Regulations Would Limit Effectiveness Of State Workarounds

Beginning in 2018, the itemized deduction for state and local taxes (SALT) will be capped at $10,000. This is another significant change resulting from the Tax Cuts and Jobs Act (TCJA), especially for taxpayers living in states with high property taxes and state tax rates, such as New York and New Jersey.

Since the introduction of the TCJA, there has been a lot of discussion among various states to introduce legislation that would provide a workaround to this tax limit. New York, New Jersey and Connecticut have all passed laws to circumvent the new Federal tax law. Among the concepts introduced is the idea for cities and states to create charitable funds to collect monies from taxpayers. This would allow the taxpayers to claim a charitable contribution on their federal tax return if they will be itemizing. It will also permit them to claim a state tax credit for this amount.

However, the IRS has proposed regulations to block the states from such workarounds. The new rule states that if a taxpayer received a state or local tax credit for a charitable contribution, then their federal charitable deduction must be reduced by the same dollar amount. The IRS’s basis for this law is the existing rules regarding charitable contributions. You may only deduct a charitable contribution for which no personal benefit was received.

Calculating the limitation is extremely straight-forward – a person whose contribution is $50,000 and receives a state credit in the amount of $40,000 can only deduct $10,000 as a contribution on his federal return ($50,000 contribution – 40,000 state credit = 10,000 allowable deduction). If the tax credit was less than fifteen percent of the contribution, their deduction is not limited.

Multiple states have filed lawsuits against the IRS and Treasury claiming the new tax law violates the constitution and unfairly targets Democratic states.

As always, we will keep you updated as the new rules continue to be clarified. For specific guidance, or to find out how these new changes affect you personally, reach out to your Bernath & Rosenberg Tax Advisor.

Chana Striks, CPA, Manages the Family Office Services Division at Bernath & Rosenberg. She assists clients with their complex financial lives and finds solutions for their unique needs and challenges. 

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