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Treasury Department denies states’ SALT workaround attempts

Residents in high tax states like California, Connecticut and New York have voiced frustration over some provisions included within the new tax law. One specific provision in the Tax Cuts and Jobs Act (TJCA) that hit taxpayers who reside within these states hard was the state and local tax (SALT) limitation.

How did this TCJA provision target high tax states? The provision within the TCJA that addressed the SALT deduction resulted in a strict limit on the deduction. The 2017 tax law resulted in a $10,000 cap for SALT deductions on their federal returns.

How did states’ respond? Some states attempted to put together workarounds to help residents get a discount. One example: development of a charitable fund. Taxpayers in New York and Connecticut could effectively claim a charitable donation when paying their state taxes — something they could still get a deduction for on their federal tax returns.

How did the feds respond? Unfavorably. The United States Treasure Department recently issued regulations that prohibit the use of charitable organizations as a SALT deduction workaround. The agency justified this move by stating it was applying a “longstanding principle of tax law.” The basic idea involves the concept that when a benefit is involved in a donation, the donation is no longer completely charitable.

As a result, taxpayers cannot take a complete deduction on a donation made to a state charitable organization if done to gain the ability to take a charitable donation deduction on their federal tax returns while also essentially paying their state property tax bill.

The move serves as a reminder to move forward with tax planning strategies wisely. It is often wise to seek legal counsel experienced in these matters to better ensure a successful plan.

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