How high-tax states may try to get around the new SALT deduction cap

Putting a $10,000 cap on state and local tax deductions was one of the most controversial changes in the federal tax ...

Posted: Jan 3, 2018 10:40 PM
Updated: Jan 3, 2018 10:40 PM

Putting a $10,000 cap on state and local tax deductions was one of the most controversial changes in the federal tax overhaul that was just signed into law.

It's been so controversial, in fact, that high-tax states, which feel unfairly targeted, may try to find a way around it when their legislatures start their spring sessions in the coming weeks.

"This tax provision hits the blue states by eliminating the state and local tax deductibility and uses that money to finance the tax cut in the red states," said New York State Gov. Andrew Cuomo on CNN's "New Day." Cuomo has said he is looking for ways to redesign the New York tax code to counter this "federal assault."

The thinking is if filers can't deduct the state and local taxes they pay in excess of $10,000 on their federal returns, states like New York, California, New Jersey and Illinois may try to let them get the full deduction anyway -- just by different means.

And those means involve using loopholes created by the hastily passed law.

Allowing filers to make charitable contributions to their states

One possible strategy that tax experts expect states to consider is letting filers make a charitable contribution to their state in exchange for a tax credit and then deduct that contribution on their federal return, since the new law doesn't cap deductible charitable contributions unless it exceeds 60% of your adjusted gross income.

A basic way it might work is this: Say you pay $30,000 in state income and property taxes in 2018. You may only deduct $10,000 of that on your federal return. To help you preserve the deduction for the remaining $20,000, your state government lets you make a $20,000 charitable contribution to the state in exchange for a $20,000 tax credit on your state tax return.

But now you could claim a $20,000 charitable deduction on your federal return in addition to your $10,000 SALT deduc tion.

Related: Making sense of the new cap on state tax deductions

Making charitable contributions to states is already permitted under the Internal Revenue Code and filers may deduct the full amount on their federal returns even if they also get a tax benefit from their state for the contribution, according to Kirk Stark, a tax law professor at UCLA.

For instance, landowners who agree not to develop a portion of their property for conservation purposes might get a state tax credit worth 60% of the value of that conservation easement.

So if the easement is worth $100,000, a landowner takes a $60,000 state tax credit on top of a $100,000 federal tax deduction.

Expanding this type of benefit to state income taxes might raise legal questions if the charitable contribution is viewed as being made expressly for the purpose of reducing one's tax bill, according to Max Behlke, director of budget and tax at the National Conference of State Legislatures.

But Stark, who is providing technical assistance to California Senate leader Kevin de Leon in drafting a bill to mitigate the SALT cap, notes that there is a lot of precedent of the IRS and the courts supporting the full deductibility of charitable contributions to states in other circumstances where one might make the same argument.

Replacing income taxes with payroll taxes

Another option raised by tax experts: Some states may choose to move away from the income tax on wages to a state-based payroll tax paid by employers, which are still allowed to deduct those payments.

Your employer would essentially pay the taxes for you, and lower your pay by the same amount.

"[S]tates can shift from non-deductible, over-the-cap state income taxes to still-deductible, employer-side payroll taxes," 13 tax experts wrote in a paper exploring the various ways the new tax rules may be gamed.

One of them -- Daniel Hemel, an assistant professor of tax law at the University of Chicago -- offered an example of how it might work in Illinois, which imposes a 4.95% flat income tax.

"Of the next $100 I earn in wages, $4.95 will go to the state and $95.05 will go to me (before federal taxes). Now imagine if instead the state imposed a 5.208% payroll tax on employers. My employer would pay me $95.05 and then pay 5.208% x $95.05 = $4.95 to the state," Hemel wrote on Medium.

Related: How much you'd pay under the GOP tax overhaul depends on a million things

The process would be more complicated in states that impose a progressive income tax. And in any case it might be difficult to explain to employees why their wages are lower, even though the net effect on their take-home pay would be unchanged.

Whatever states choose to do, however, the upshot for the federal government may be the same: The hundreds of billions of dollars that the SALT cap was estimated to raise may not materialize.

Indiana Coronavirus Cases

Data is updated nightly.

Cases: 578494

Reported Deaths: 9202
CountyCasesDeaths
Marion798821282
Lake43601664
Allen31380537
Hamilton27675303
St. Joseph26409369
Elkhart23873336
Vanderburgh18192211
Tippecanoe16999116
Porter14183158
Johnson14120277
Hendricks13560236
Madison10312209
Vigo10297171
Clark9952128
Monroe8933105
Delaware8638129
LaPorte8589153
Kosciusko777375
Howard7712136
Warrick624990
Hancock621995
Bartholomew616094
Floyd5971105
Wayne5811155
Grant5716108
Dubois533570
Boone523167
Morgan501485
Marshall487084
Henry483262
Cass464959
Noble453956
Dearborn443343
Jackson410145
Shelby394376
Lawrence374172
Clinton359838
Gibson348556
DeKalb333063
Montgomery329150
Knox323339
Harrison317242
Miami305043
Steuben300740
Adams291635
Ripley287145
Wabash286345
Whitley286324
Huntington278757
Putnam278046
Jasper274933
White262038
Daviess255671
Jefferson242738
Fayette239248
Decatur237382
Greene229259
Posey225626
Wells225146
LaGrange222061
Scott212837
Clay212432
Randolph204940
Jennings188635
Sullivan185831
Spencer176917
Fountain175125
Washington170216
Starke169241
Jay160521
Fulton156829
Owen155536
Carroll150115
Orange146333
Rush145618
Vermillion141633
Perry141327
Franklin139333
Parke12718
Tipton126232
Pike111325
Blackford105122
Pulaski93636
Newton87820
Brown84428
Benton83010
Crawford7229
Martin68013
Warren6427
Switzerland6035
Union6033
Ohio4547
Unassigned0372

Ohio Coronavirus Cases

Data is updated nightly.

Cases: 807293

Reported Deaths: 9990
CountyCasesDeaths
Franklin95508704
Cuyahoga80262964
Hamilton59783436
Montgomery40858396
Summit32488697
Lucas29495575
Butler29100225
Stark24048388
Warren18471135
Lorain17563207
Mahoning16430334
Lake14941134
Clermont14703103
Delaware1349574
Licking12353132
Trumbull12096297
Fairfield1184280
Greene11338132
Medina10815164
Clark10334261
Wood9742153
Allen9355126
Miami867373
Portage8628104
Richland8604111
Marion7231112
Tuscarawas6987172
Columbiana6922124
Pickaway689050
Wayne6599162
Muskingum648939
Erie5729117
Hancock529088
Ross518287
Scioto508753
Geauga469955
Darke450589
Ashtabula431467
Union422327
Mercer419485
Lawrence417051
Sandusky413262
Auglaize407059
Shelby404621
Seneca404354
Huron399738
Jefferson391565
Belmont378140
Putnam359370
Washington357039
Athens35469
Madison331128
Knox329022
Ashland322538
Fulton319043
Defiance311476
Crawford306769
Preble306434
Brown289617
Logan284828
Ottawa275534
Clinton272741
Williams265757
Highland255618
Jackson250743
Guernsey234625
Champaign233727
Fayette218929
Morrow21754
Holmes215562
Perry215317
Henry206147
Hardin200932
Coshocton194517
Van Wert193744
Wyandot186948
Gallia186226
Adams160815
Pike160116
Hocking157423
Carroll143216
Paulding137521
Noble116138
Meigs99021
Monroe93827
Harrison8428
Morgan75826
Vinton64013
Unassigned00
Fort Wayne
Cloudy
35° wxIcon
Hi: 39° Lo: 34°
Feels Like: 29°
Angola
Cloudy
32° wxIcon
Hi: 36° Lo: 32°
Feels Like: 32°
Huntington
Cloudy
34° wxIcon
Hi: 38° Lo: 34°
Feels Like: 27°
Fort Wayne
Cloudy
35° wxIcon
Hi: 39° Lo: 33°
Feels Like: 29°
Lima
Cloudy
33° wxIcon
Hi: 39° Lo: 32°
Feels Like: 28°
Light Snow Friday
WFFT Radar
WFFT Temperatures
WFFT National

Community Events