SALT workaround officially squashed by Treasury Department
The Treasury Department on Tuesday issued final regulations that will officially prohibit high-tax states from utilizing workarounds to evade the new cap on state and local tax (SALT) deductions.
As part of the Tax Cuts and Jobs Act, SALT deductions were capped at $10,000 – which is well below the average amounts claimed by individuals residing in states such as New York, California and New Jersey. The average deduction claimed in California, for example, is $22,000, according to Kevin de Leon, a Democratic member of the California state senate.
Therefore, in response, a number of state governments proposed or enacted legislation that would allow taxpayers to make charitable contributions to an established state fund in order to earn a credit. The goal would be to allow the residents to take the full amount given as a deduction by transforming a non-deductible payment into a charitable contribution.
However, the IRS blocked that strategy through guidelines issued on Tuesday, which require taxpayers to subtract the value of their state and local tax deductions from their charitable contributions.
The regulations also provide exceptions for state tax deductions and tax credits of no more than 15 percent of the amount of the donation.
The regulations apply to contributions made after Aug. 27, 2018.
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Treasury Secretary Steven Mnuchin said in 2017 that he hoped it sent a message to state governments that “they should try to get their budgets in line.”
Meanwhile, Democrats have said they would try to undo the cap on state and local tax deductions. New York Gov. Andrew Cuomo has said the new tax change would lead to a decline in revenues in the state because taxpayers would leave.
The Treasury said it would continue to evaluate the issue and release further guidance if necessary.