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Here's how Californians may be able to skirt SALT cap

A top lawmaker in California introduced a bill this week to protect state residents who will be hurt by ...

Posted: Jan 7, 2018 9:44 AM
Updated: Jan 7, 2018 9:44 AM

A top lawmaker in California introduced a bill this week to protect state residents who will be hurt by a new $10,000 cap on how much they may deduct in state and local taxes on their federal returns.

The cap was one of the most controversial provisions included in a federal tax overhaul signed into law last month.

The proposed California workaround, by Senate leader Kevin de Leon, is the first of what are expected to be several legislative efforts in high-tax states to mitigate the impact of the SALT deduction cap on their residents.

The average state and local tax deduction claimed by Californians is well above the cap, at $18,438, according to de Leon's office.

To help ensure they can still deduct much or all of the state and local taxes they pay, de Leon has proposed letting residents make a charitable contribution to the state in exchange for a tax credit.

That way, the charitable contribution would be deductible on their federal return, since the new federal tax law doesn't limit deductions for charitable gifts except in certain instances.

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

Here's how it would work: Californians would pay state and local taxes throughout the year just as they do now. But if they exceed $10,000 the resident taxpayer has a decision to make.

Say someone pays $19,000 total. At any point in the year, she could choose to make a $9,000 charitable contribution to the state. In exchange, the state would grant a tax credit, which would reduce her state tax bill by $9,000. When she files her federal tax return, she could deduct $10,000 for her state and local taxes plus $9,000 for her charitable contribution to the state.

Of course, that would require that taxpayer to pay $9,000 to the state before effectively getting it back as a tax credit when she files her return.

De Leon hopes to get the bill to the California Senate floor for a vote by the last week of January, his spokesman said.

Move could be viewed as legally questionable

Even if the California measure -- or measures like it in other states -- pass, some will argue the move is legally questionable.

For instance, a charitable contribution is typically not considered deductible if the donor benefits from it.

"If one purchases a $250 ticket to a benefit dinner, and the fair market value of the dinner is $50, then $200 can be deducted, not $250," Tax Foundation senior policy analyst Jared Walczak wrote in a paper examining the issue of proposed workarounds to the SALT deduction cap.

A contribution made in exchange for a 100% state tax credit, solely to lower a donor's federal tax liability, could be viewed as wholly benefiting the donor.

In addition, a contribution usually isn't considered deductible if it causes the recipient (in this case, the state) to incur a liability (having to provide a tax credit), Walczak notes.

As with many tax issues, though, there are often good counterarguments backed by case law and precedent.

Kirk Stark, a tax law professor at UCLA, notes there are many past examples in which the IRS and the courts have blessed the federal deductibility of state-level charitable contributions made in exchange for state tax credits.

Indiana Coronavirus Cases

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Cases: 749532

Reported Deaths: 13746
CountyCasesDeaths
Marion1030911775
Lake554681006
Allen41636691
St. Joseph36947564
Hamilton36527416
Elkhart29363459
Tippecanoe22862225
Vanderburgh22542400
Porter19331325
Johnson18405388
Hendricks17588317
Clark13200193
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Warrick7854156
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Grant7229179
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Boone6917103
Morgan6736141
Dubois6211118
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Cass5991108
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Jay200932
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Ohio Coronavirus Cases

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Cases: 1107225

Reported Deaths: 20091
CountyCasesDeaths
Franklin1285061459
Cuyahoga1156322204
Hamilton812991245
Montgomery524951040
Summit48356999
Lucas43309817
Butler38903603
Stark33297929
Lorain25641502
Warren24558303
Mahoning22332601
Lake21139385
Clermont20098252
Delaware18819135
Licking16649222
Fairfield16564204
Trumbull16527479
Medina15597270
Greene15256246
Clark14223306
Wood13281197
Portage13229214
Allen11903239
Richland11598211
Miami10837223
Wayne9116222
Columbiana9023230
Muskingum8889135
Pickaway8652122
Tuscarawas8639247
Marion8635138
Erie8052164
Ashtabula7139179
Hancock6996131
Ross6934161
Geauga6832150
Scioto6530104
Belmont6149174
Union583849
Lawrence5723102
Jefferson5669158
Huron5539122
Sandusky5437125
Darke5415129
Seneca5344126
Washington5308109
Athens523360
Auglaize501687
Mercer487285
Shelby476295
Knox4568112
Madison443765
Ashland435197
Putnam4334103
Fulton431871
Defiance431798
Crawford4033110
Brown401961
Logan387377
Preble3847103
Clinton378566
Ottawa372781
Highland359465
Williams347878
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Guernsey324253
Jackson317554
Perry297150
Morrow291340
Fayette285350
Hardin274865
Henry273267
Holmes2699101
Coshocton268459
Van Wert247264
Adams242956
Pike242735
Gallia240550
Wyandot234556
Hocking220162
Carroll196948
Paulding176342
Meigs148240
Monroe136144
Noble135839
Harrison113738
Morgan109624
Vinton85417
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