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States file lawsuit to challenge SALT cap: Was it successful?

The Tax Cuts and Jobs Act (TCJA) led to a limit on the deduction for state and local tax (SALT) payments. The law currently caps the deduction at $10,000.

Since high tax states like California, New York and Connecticut often get tax payments from residents well over this $10,000 limit, these states have voiced frustration with the limit. Residents in high tax states have begun to reconsider their tax planning strategies, including moving to lower tax states.

In response, four states, New York, New Jersey, Connecticut and Maryland, filed a lawsuit over the cap.

State of New York v. Mnuchin: States fight SALT cap

The case, State of New York v. Mnuchin, sought to invalidate the $10,000 SALT cap. The states’ argued the cap was in violation of the state’s sovereign authority to make their own choices over how much to invest in its own infrastructure, businesses and the like.

In the past, Congress has allowed residents to take a deduction on their federal income tax returns for all or at least a substantial portion of their SALT payments. This has been true since the first federal income tax laws was passed in 1861.

Ultimately, the U.S. District Court for the Southern District of New York threw out the lawsuit, stating the case could not move forward because “the federal government has the ‘exhaustive’ power to impose and collect income taxes.”

Other options to defeat the SALT cap

This is not the end to states’ challenges to the SALT cap. Legislation is currently under consideration that would allow larger SALT deductions. We will provide updates on this and other legal strategies to defeat the SALT cap as they become available.

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