Will the IRS Stop States From Avoiding Tax Deduction Caps?

Will the IRS Stop States From Avoiding Tax Deduction Caps?

By far, one of the most controversial aspects of the new Tax Cut and Jobs Act (TCJA) has been the reduction in the state and local income tax deduction. This has long been an important deduction for many people. Being able to deduct your state and local taxes (SALT) from your federal return has been a big boost for taxpayers all over the country. That’s especially true for taxpayers that live in states with high income tax, like New York, New Jersey and California.

Deduction Cap Hurts Taxpayers in High-Tax States
The TCJA allows a deduction of up to $10,000 combined for either income tax or sales tax and property tax. But for people living in the highest tax states that is little consolation, as $10,000 won’t go very far. Recently, several high-tax states have taken the matter into their own hands by introducing and passing legislation that allows taxpayers to work around this problem.

Workarounds Could Save Thousands
Here’s how they work. Municipalities will be allowed to create charitable funds to help pay for local services. They will also offer property tax credits to give homeowners extra incentive to make contributions. Those who itemize their deductions would be able to claim a charitable deduction on their federal taxes, for more than the $10,000 SALT cap.

The workarounds could save many taxpayers thousand of dollars. For example, the average SALT deduction for New York residents was $22,169 in 2015. That’s a loss of more than $12,000 on average under the new law. The numbers are similar for residents of Connecticut and New Jersey.

The Government May Still Fight Back
That’s why many taxpayers were thrilled to hear of these legislative acts to help offset the loss of this deduction. However, the story doesn’t end there. In fact, it might just be getting started. That’s because the IRS may decide to fight back. Therefore, according to many accountants, taxpayers should be careful.

So far, U.S. Treasury Secretary, Steve Mnuchin has said: “I hope that the states are more focused on cutting their budgets and giving tax cuts to their people in their states than they are in trying to evade the law.”

States Prepared to Fight
The states that have passed legislation have already stated they are willing to go to court to fight for their legislation workarounds. However, many accountants and tax advisors are telling taxpayers to hold off on making these charitable contributions for now. It is likely that the federal government and the IRS will contest what these states are doing and fight them in court.

Play it Safe for Now

Some attorneys, as well as critics of the workarounds, have noted that in order for a contribution to be deductible, the IRS requires a charitable intent to be present. Additionally, they say the fact that municipalities are offering donors a credit for donating to a charitable fund might look a little fishy. So far, for its part, the IRS has not said one way or the other whether or not it will allow the workarounds to go forward. However, for now, it might be in the best interest of tax payers in these states, to wait to find out.

We hope you found this article about “Will the IRS Stop States From Avoiding Tax Deduction Caps?” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

To receive our free newsletter, contact us here.

Subscribe to our YouTube Channel for more updates.

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

Alan L. Olsen, CPA, Wikipedia Bio

GROCO.com is a proud sponsor of The American Dreams Show.

The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.

Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.

They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.

Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.