New Treasury rule won't allow SALT deduction workarounds

The United States Treasury threw cold water on attempts to work around the cap on state and local tax deduct...

Posted: Aug 24, 2018 10:41 AM
Updated: Aug 24, 2018 10:41 AM

The United States Treasury threw cold water on attempts to work around the cap on state and local tax deductions Thursday.

The cap was one of the most controversial parts of the federal tax overhaul. It puts a $10,000 limit on how much taxpayers can deduct from their federal bill for what they pay in state and local taxes, known as SALT.

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Many high-tax states say the cap on what was once an unlimited deduction disproportionately hurts their residents.

New York, New Jersey, and Connecticut passed legislation to help taxpayers get around the cap and other states are considering similar policies.

Generally, the workarounds would allow taxpayers to make charitable contributions to their state in exchange for a tax credit.

But Treasury proposed a long-awaited rule Thursday that would prevent charitable contributions from being used to circumvent the new cap.

"Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families," said Secretary Steven Mnuchin in a statement.

"The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions," he said.

The rule is mechanically simple, said Steve Wlodychak, principle, Indirect Tax at Ernst and Young.

If you are getting a state tax credit benefit in exchange for the charitable contribution you have to reduce the value, dollar-for-dollar, for the purposes of the federal tax bill, he said.

The rule will also have an impact on other state tax credit programs that were established before the tax overhaul to promote charitable giving. Some, for example, are specifically for school choice initiatives.

These charitable tax programs were not spared by the proposed rule, said Steve Rosenthal, a senior fellow at the Tax Policy Center.

They may still offer a state tax advantage, but will not reduce you federal tax bill.

New York, New Jersey, Connecticut and Maryland, sued the Treasury and IRS last month, claiming the new tax law violates the constitution by unfairly targeting Democratic states.

New York Governor Andrew Cuomo said he would fight the guidance from Treasury.

"We are confident that the recently enacted opportunities for charitable contributions to New York state and local governments are consistent with federal law and follow well-established precedent," he said in a statement.

Officials for New Jersey and Connecticut could not immediately be reached for comment.

Indiana Coronavirus Cases

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CountyCasesDeaths
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Tippecanoe21765212
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Ohio Coronavirus Cases

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Cases: 1052099

Reported Deaths: 18991
CountyCasesDeaths
Franklin1221671356
Cuyahoga1070432069
Hamilton781801168
Montgomery50040996
Summit45383909
Lucas40122765
Butler37721570
Stark31437895
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Mahoning20905583
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Clermont19441229
Delaware18038130
Licking16124207
Fairfield15708197
Trumbull15585460
Medina14868259
Greene14668236
Clark13634293
Wood12767185
Portage12384196
Allen11328229
Richland11041198
Miami10536214
Muskingum8706127
Wayne8576209
Columbiana8546226
Pickaway8436121
Marion8377135
Tuscarawas8376240
Erie7566154
Hancock6714123
Ross6699146
Geauga6537146
Ashtabula6495165
Scioto6289101
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Huron5307114
Darke5273121
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Seneca5124120
Washington5076107
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Auglaize475684
Mercer471684
Shelby456090
Knox4387108
Madison422859
Putnam421599
Ashland413188
Fulton409467
Defiance402596
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Brown386455
Logan372976
Preble370398
Clinton361560
Ottawa356978
Highland347059
Williams326774
Champaign320657
Jackson308451
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Perry289949
Fayette277848
Morrow275339
Hardin264264
Henry263766
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Holmes253399
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Pike233331
Adams228552
Wyandot227253
Hocking209059
Carroll189247
Paulding168638
Meigs141538
Noble132837
Monroe128841
Morgan106623
Harrison105336
Vinton81514
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