When the tax cuts were passed in 2017, one major sticking point was the limit on how much of your state and local taxes (SALT) could be listed as a deduction on your federal return. The amount was capped at $10,000 and this brought howls of protest from Democrats, particularly those from higher-income states like New York and California. They quickly got to work seeking to thwart the rules by allowing taxpayers to “donate” the extra amount to a “charity” set up specifically for the purpose of evading the law. That’s about to come to a halt, as a new rule from the IRS goes into effect. (CNN)
Residents of high-tax states like New York and New Jersey will no longer be able to bypass a $10,000 limit on federal deductions for state and local taxes.
The Treasury Department on Tuesday finalized regulations that would bar individuals in high-tax states from creating charitable funds in exchange for state tax credits — a maneuver developed as a workaround for changes to the treatment of state and local taxes under the 2017 tax reform…
“The regulation is based on a longstanding principle of tax law: When a taxpayer receives a valuable benefit in return for a donation to charity, the taxpayer can deduct only the net value of the donation as a charitable contribution,” the Treasury Department said in a statement.
I’d been wondering how long it was going to take for the IRS to get around to doing this. Most of these schemes that were enacted in primarily blue states were obvious dodges from the beginning. The one in New York, for example, allowed taxpayers to take the amount of state tax in excess of $10,000 and make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes.
They described these transfers as “fully deductible charitable contributions for federal income tax purposes.” But since when is giving money to a government controlled fund considered a donation to a charity? (Well, in the case of New York, the budget is so badly managed they could probably use some charity, but that’s not the point.) It was a scheme intended to stick a thumb in the eye of the Republican controlled Congress and a way to get around the law.
As we’ve discussed here before, a $10,000 cap on state taxes is pretty generous. That works out to someone making nearly $150K per year. And even then, you’d only lose the deduction for the taxes you paid on income above and beyond the $150K mark. If you earned a quarter million last year, that means you would miss out on a deduction of about six thousand. Is that really such a burden for people in the top five percent of earners?
Oh, and there’s one other question to consider as the Democrats work on a way to thwart this new rule. Don’t they constantly talk about raising taxes on the wealthy? Why are they complaining about this?