SALT cap workaround gets green light from IRS
New Jersey is among several states that has already implemented the strategy
High-tax states have long sought a legal workaround to help residents deal with the $10,000 cap on state and local tax deductions – and it appears they may have found one.
The IRS issued recent guidance that would allow small businesses – classified as pass-through entities, proprietorships and partnerships – to circumvent the cap by allowing them to pay their income taxes at the entity level.
The Tax Cuts and Jobs Act cap applies to income taxes paid by individuals, which is normally how pass-through entities have paid since the early 1990s.
New Jersey and Connecticut have allowed the strategy, as have Rhode Island and Maryland in addition to a handful of other states.
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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 former Democratic member of the California state senate.
In June 2019, the IRS blocked a strategy whereby states attempted to allow taxpayers to make charitable contributions to an established state fund in order to earn a credit. The goal was to allow the residents to take the full amount given as a deduction by transforming a non-deductible payment into a charitable contribution.
New Jersey joined three other states in suing to have the SALT cap overturned – a suit that was dismissed by a judge last year. The four states filed a notice of appeal at the end of 2019.
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While Democrats have pushed to have the SALT cap repealed, it is unclear whether President-Elect Joe Biden will make that a priority. He has repeatedly pledged to repeal Trump’s tax cuts.