By Alan Olsen
It’s no secret that not everyone is happy with the nation’s new tax reform bill that was signed into law last December. Among those least pleased with the bill are taxpayers that live in high-tax states. In fact, several of these states are doing everything in their power to fight back.
One of the biggest controversies in the new bill is the reduction of the state and local tax deduction. Originally, it was going to be completely eliminated, so the news could have been worse. The new law does still allow a deduction of up to $10,000 combined for property taxes, and either income tax or sales tax.
But that is little consolation to many taxpayers living in states like New York, New Jersey, California, and Connecticut where $10,000 won’t go very far. Losing the state and local tax deduction is a big hit for people who already pay much higher taxes. So what are these states doing about it?
Let’s just say they aren’t going down without a fight. For starters, some states are looking into taking legal action. The Governor of New York, Andrew Cuomo, is already calling the new limit unconstitutional and the state is looking into the possibility of suing the federal government.
While it remains to be seen how far a lawsuit would actually go other states are looking at more realistic solutions. For example, one possibility would be to allow taxpayers to pay their taxes as charitable donations. Another option is to credit every dollar paid with a matching dollar that could be used as a charitable donation deduction.
These options could work because, there is currently a 50% of AGI maximum for charitable donation deduction, extended to 60% under the new bill starting 2018. But it’s not full-proof because the IRS could counter that you don’t need any deduction if you get a matching credit for every dollar you pay.
Time will tell if states will be able to circumvent the new law, but it will definitely be an interesting battle to watch play out.