The new tax law has been somewhat controversial since it was passed just before Christmas, a little over 6 months ago. One of the most controversial measures in the bill is the cap on state and local income, and the real estate tax (better known as SALT) deduction to $10,000 per year.
Many saw this as a stab at some of the higher tax states, such as New York, New Jersey, Illinois, and California. In other states, this cap will have little effect on most taxpayers (States with no income tax like Florida, Texas, and Nevada).
But for the high taxed states, legislators have taken steps to try to lessen the blow to their residents, including the formation of charitable trusts to accept tax payments. However, the IRS and the Treasury Department are saying “not so fast.” Although there is a lot to still be determined, it looks like we are starting to get some more clarity around this portion of the law.
SALT Deduction in High Taxed States
The state and local tax deduction (also known as SALT) has been one of the keys to luring residents to states such as New York, New Jersey, Illinois, and California. These states often have much higher than average cost of living, which includes some of the highest property taxes and income taxes in the country.
Being able to write these taxes off against your federal income tax burden (at least for many residents) has been a huge incentive – the $10,000 cap could certainly hurt residents of these states because households often see property taxes near or above $10,000 (basically making their income taxes useless from a deduction standpoint).
Of course, many of these states are looking for ways to ease the burden on their taxpayers (making it easier for them to stick around). These high tax states are certainly worried about people leaving for “greener pastures,” Or at least pastures where they can keep more of their green.
States Pushing For Work Around
As you can imagine, the high tax states are worried about residents leaving for less expensive states. The most common law being passed is the startup of charitable trusts to basically “donate” the money a taxpayer would have paid for real estate taxes.
This is unlikely to stand against an IRS audit due to the fact that deductible charitable contributions must come with no benefit. In New Jersey, the legislature recently passed an increase to the property tax deduction on the state tax return from $10,000 to $15,000.
Lastly, a bill has been introduced to potentially pay any state income taxes that would be due on the business level instead of the personal level. Either way, I think we are potentially in for a long battle the could make its way up through the federal courts.
Potential Supreme Court Battle?
All in all, when the law was originally passed back in December of 2017, there were a lot of vague and gray areas that needed to be sorted out. As the months have gone on, there has been more and more clarity.
One of the most heated topics has been the cap of the state and local tax deduction at $10,000 total per year. Although many of the high tax states are attempting to circumvent the law, the federal government does not seem to be amused. I believe that there could be challenges that make their way up to the Supreme Court eventually!
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