High-tax states dealt SALT workaround blow, but these strategies are still viable
The Treasury Department this week killed a strategy higher-tax states adopted in order to help ease the effects of the $10,000 SALT cap on residents – but there are other existing strategies that some can still take advantage of.
On Tuesday, the Treasury Department limited the ability of taxpayers to make charitable contributions to a state fund – which had been set up in places like New York and New Jersey – to earn a credit. The government classified this transaction as a “quid pro quo,” and issued guidance that will require taxpayers to subtract the value of their state and local tax deductions from their charitable contributions.
Additionally, the IRS said it would allow an exception for people who contributed to one of these funds and received a credit of 15 percent or less.
“Even though there’s a quid-pro-quo to some extent … it’s so small that they’re willing to overlook it and still allow it,” Alan Goldenberg, a principal at Friedman LLP, told FOX Business.
But there are at least two other ways people have been looking to circumnavigate the new SALT cap, which was implemented as part of the Tax Cuts and Jobs Act.
One of them is an employer-side payroll tax. Under this scheme, employers would essentially pay income taxes to the state, which are deductible, on taxpayers’ behalf. Workers would receive a taxable income that would be the same as if they could claim the SALT deduction.
Goldenberg, however, noted that a very small number of companies in New York – where he is located – opted into this strategy. He estimates maybe 400 did so.
Another method, which Goldenberg said has “a little more legs to it,” is a passthrough entity tax. This is similar to a corporate tax, but for LLCs, small businesses and partnerships. It allows for passthrough entities to be taxed at the entity level rather than the individual level, and individuals receive a tax credit.
“In that situation, the tax has already been paid so therefore the individuals who are partners don’t have the personal income tax liability,” Goldenberg said.
Limitations are, however, that most people are not in partnerships. Under the charitable fund strategy, essentially anybody with a state income tax obligation could participate.
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Goldenberg noted that the other two workarounds are probably safe from the IRS’ reach.
The guidelines released on Tuesday do not distinguish between programs established before the tax overhaul went into effect and those developed by high-tax states, like New York and California, in the wake of its implementation. That means other states with funds that had been offering tax credits in exchange for things like private school uniforms or scholarships, will also lose the benefit. The states that have these funds are largely concentrated in the South, in lower-tax states, Goldenberg noted.