As part of the new Tax Cuts and Jobs Act, Congress placed a $10,000 limit on deductions for state and local taxes, commonly called SALT. If you typically pay less SALT than that, then no problem, right? Many taxpayers in states with high income taxes, though, don’t see it that way. They feel the regulation unfairly penalizes them. Here’s what those states did to try to ease the burden on affected taxpayers and how the IRS is responding.

Just How Unfair Is It?

Some states—such as Alaska, Texas, and Florida—don’t collect any state income tax. They generate revenue in other ways. To taxpayers in these states, the SALT cap doesn’t affect them at all.

Other states—including California, New Jersey, New York, Minnesota, Vermont, and Iowa—use income tax as the main source of revenue. New Jersey, for example, has a state income tax rate of 8.97 percent. In 2016, nearly two million tax filers (almost 42 percent of filers in the state) claimed the SALT deduction, with an average deduction of $18,092. New Jersey taxpayers will lose nearly half of the SALT deduction they got in prior years.

New Jersey isn’t the worst of it. California’s state income tax rate is 13.30 percent. Taxpayers there will see their SALT deduction drop precipitously. It’s no wonder California taxpayers feel unfairly targeted by the SALT cap rule. On the other hand, proponents of the rule point out that the cap affects mainly high-income earners and that it was necessary to pay for the broader tax cut most Americans received.

What Some High-Income States Did

In an attempt to counter the new SALT limits, some states tried to find a workaround that would allow taxpayers to circumvent the rule. A number of legislatures made it possible for taxpayers to transfer cash to government-controlled funds or to other specified enterprises. In exchange, taxpayers would receive credits against the state or local taxes they would eventually owe. The transfers would be treated essentially as charitable donations that would be fully deductible for federal income tax purposes.

New York and New Jersey, for example, gave local governments the authority to set up charitable organizations to accept property tax payments. Homeowners then received credits for those contributions that would be used to offset their federal taxable income. New York offers credits on 85 percent of charitable donations, while New Jersey offers credits on 90 percent.

How the IRS Is Responding

Needless to say, the IRS hasn’t been happy with the state and local government workarounds. It has proposed guidance that would crack down on the practice and make it illegal for states to offer such programs. The gist of their argument is that a charitable contribution may not promise something of value—like a tax credit—in return for the contribution. That would be a quid pro quo arrangement. It’s why, when you make a donation to an organization and you get a gift, like a CD or a t-shirt, you have to deduct the value of the gift from the donation when you claim it on your taxes.

Some states have vowed to fight the guidance or the rule itself, which they see as a states’ right issue that overturned 150 years of precedent. The battle appears to be far from over.

Taxpayers with questions about the new tax law should consult with a qualified accountant. Especially if you paid high income taxes in the past, the advice of an accountant may help you avoid paying more than your fair share come tax time.

SOURCE1800 Accountant
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