IRS Rules Against “SALT” Deduction Work-Arounds

The IRS Tuesday squashed attempts by some high-tax states to circumvent the federal cap on the deductibility of state and local taxes (“SALT”), issuing final regulations that barred governments from giving substantial tax credits in exchange for charitable contributions.

Several states like New Jersey tried to get around the new $10,000 deduction cap by allowing local governments to set up charities for their services and provide credits to taxpayers that contribute to them. Instead of paying local taxes subject to the $10,000 federal SALT deduction cap, residents could make “charitable contributions.”

The regulations would allow tax credits equal to just 15% of the contribution, making them an unappealing way to get around the cap, which was imposed to help pay for the Tax Cuts and Jobs Act of 2017.

Gov. Phil Murphy issued a statement accusing the IRS of protecting “President Trump’s politicization” of the federal tax code.

“Finalizing a rule that prohibits us from following decades of precedent to protect our residents’ tax deductions is a gut-punch to middle-class families who know that the Trump tax plan is a complete sham,” Murphy said.  “We will continue to fight alongside our Congressional delegation and sister states to restore our residents’ full SALT deductions.”

Taxpayers will still be able to deduct up to $10,000 of state and local taxes deduction and other charitable contributions will still be deductible.