Treasury limits state and local tax cap workarounds

The Treasury Department issued final rules that would clamp down on taxpayers trying to circumvent a new cap on state and local tax deductions.

The Tax Cut and Jobs Act, promoted by the Trump administration and passed in late 2017, limits the amount of state and local taxes that can be deducted on an individual's federal taxes to $10,000 a year. The tax law's rules on SALT deductions, as they are known, caused a lot of upset in high-tax states, such as California, New York, and New Jersey where residents had previously benefited from being able to deduct much more.

It also became a highly politicized issue as many of high-tax states tend to vote for Democrats.

Some states tried to find workarounds. This included states allowing taxpayers to donate to charity funds and, in exchange, receive tax credits against their state or local taxes. Taxpayers could then deduct their donations as charitable contributions on federal taxes, lessening their broader tax burden.

But under the new regulations, taxpayers would only be able to deduct charitable contributions greater than the amount of the tax credit they received. For example, if a taxpayer donates $1,000 to a state program and receives a 70% credit, they could only claim $300 — not the $700 they may have been aiming for.

There are some exceptions for dollar-for-dollar state tax deductions and for tax credits in which a taxpayer gets a credit worth less than 15% of their donation.

 

Dawn Kamber