A few weeks ago I wrote about the brilliant scheme that California is pushing, whereby they could get around the caps on SALT deductions (State and Local Taxes) for federal tax filing. Under this genius plan, Californians paying more than the allowed amount would be permitted to “donate” an equal amount to some new fund, immediately transferred into the state’s coffers, and then claim that amount on their federal taxes as a charitable contribution. What could possibly go wrong?
Over at Townhall, Hank Adler explains a few more wrinkles in this plan. While it’s primarily more of a fail on the political optics front, he points out that the California legislature isn’t exactly out there fighting for the little guy here. This is a deal which does precisely what Nancy Pelosi constantly accuses the recent tax cuts of doing. It’s a massive giveaway to the very wealthy while delivering precisely nothing to the working class.
There is a claim being made that this legislation will save “middle income taxpayers” money. This would be the case only rarely because the increase in the federal standard deduction from $12,600 to $24,000 is so significant. In 2015, the data prepared by the California Franchise Tax Board shows that until adjusted gross income for federal purposes exceeds $150,000, the average qualified deductions are around $21,000.
Putting the $24,000 standard deduction into a little perspective, a married California taxpayer with $100,000 in California taxable income pays $4115 in California income taxes. 85% of 4115 is $3500. So, before that taxpayer will become a taxpayer who itemizes their deductions, their home interest, real estate taxes, and contributions must equal or exceed $20,500.
But the ultra-wealthy win big.
That’s pretty much in line with the estimates I came up with when the news first broke. If you earn less than $150K this plan does absolutely nothing for you. If you earn up to $200K, the change in the standard deduction, plus the fact that the SALT deduction only covers the taxes you pay on that extra income, not the income itself, means that your savings would be marginal at best. In order to benefit from this plan, you would have to be in the category of someone who literally has to decide which of their multimillion dollar mansions to stay in every weekend. You know… like Nancy Pelosi.
Adler also covers one of the other glaring flaws with the California plan. Even if they manage to do this and establish the “California Excellence Fund” for everyone to send their money to, the IRS is going to rain all over their parade. They will almost certainly, immediately institute new penalties for anyone claiming deductions on “donations” to such a fund and on any tax preparer who submits forms attempting to do that. Further, many of the people they expect to take advantage of the plan actually won’t participate because, in that wage range, most of them were already being hit with the alternative minimum tax.
As the author notes, the real story here has nothing to do with sound policy or attempting to help the middle class. This is all about the elected officials in California having such a burning hatred of anything with Donald Trump’s name attached to it that they are asking their citizens to, “undermine the federal income tax system by proposing that wealthy California taxpayers take bogus deductions on their individual tax returns.”
In that regard, it sounds like somebody ought to be going to jail for this scheme if they enact it. Sadly, it’s more likely to be the taxpayers than the lawmakers who cooked it up.