$10k Limit on SALT Deductions Stands
On Tuesday the Treasury Department issued final regulations that officially prohibit high-tax states like New Jersey, New York, and Connecticut from utilizing workarounds to evade the new $10,000 limit on state and local tax (“SALT”) deductions.
The 2017 Tax Cuts and Jobs Act capped at $10,000 the amount of state and local tax payments that taxpayers could deduct from their federal returns. In response, a number of state governments enacted or proposed workarounds to find a way to remove the economic pain of the cap.
In the workaround, a state resident could, instead of paying state property taxes, choose to donate to a state-created charitable fund, for example, $40,000. The resident would then get to write off the $40,000 as a charitable donation on his or her federal taxes and receive a state tax credit for some of that donation, easing the burden of the lower write-off for their SALT levy.
The regulations will allow taxpayers to receive a tax write-off equal to the difference between the state tax credits they receive and their charitable donations. That means the taxpayer who makes a $40,000 charitable donation to pay property taxes and receives a $25,000 state tax credit would only be entitled to a charitable write off of $15,000 on his or her federal tax bill.
The Treasury indicated it would continue to evaluate the issue and release further guidance if necessary.
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