The Tax Cuts and Job Act of 2017 limits the amount of State and Local tax deductions individuals can deduct on their 2018 taxes to $10,000. In response, states in the Northeast that feature high property taxes such as New Jersey, New York, Maryland and Connecticut created workarounds allowing municipalities with in these states to set up a charitable organization where property owners could donate in lieu of paying their property taxes.
Other states such as New Mexico, Georgia and Alabama have had success using this type of workaround for private school tuition and contributions to hospitals, however the IRS released definitive guidance in late August 2018 disallowing much of the charitable entity workaround for property taxes. The new regulation allows for a federal deduction of only the amount not credited at the state level. For instance, if a New Jersey taxpayer pays $20,000 to his state’s property tax charitable entity and in New Jersey he is eligible to deduct 90% or $18,000 of this donation on his state return, the federal government will only allow the additional $2,000 to be deducted on the federal return.
Residents of these states are now facing a situation where the $10,000 cap on State and Local Taxes means they will get no federal deduction for a large part of the taxes they pay. In these high property tax states, the property tax bill alone can oftentimes exceed $10,000 meaning all of the other taxes paid in excess of the cap will now be non-deductible. Many taxpayers will not be affected by this ruling since they do not itemize their deductions but the ones who do itemize will face a steep increase in their tax bill. 2015 figures indicate the average SALT claim for New Jersey was $18,000 and for New York a whopping $22,000.
The IRS guidance released by the Treasury Department will be in effect for taxpayers beginning in 2018 and will run through the expiration of the individual portion of the Tax Cuts and Jobs Act in 2025.
The states of New York, New Jersey, Maryland and Connecticut have filed a lawsuit against the Treasury Department claiming this regulation interferes with the right of states to sovereignly decide how to tax their residents. The states’ goal is to get the SALT cap eliminated completely as they say it unfairly targets them and ignores 150 years of tax law precedent. Legal scholars think the suit stands little chance of success. Because of the new regulations, state programs benefiting scholarship programs and hospitals in 33 states may also become non-deductible meaning popular opinion may shift and force the treasury to rethink the new issuance.
As always if you have questions please feel free to reach out to us here at Alloy Silverstein. We are happy to help with any tax planning needs you may have.
Author: Matthew McCarthy
Empowering business owners and individuals in South Jersey and Philadelphia to feel confident through proactive accounting and advisory solutions.
