The Treasury Department on Thursday moved to prevent high-tax states from using a workaround aimed at allowing residents to avoid the new limit on state and local tax deductions.
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In response to the $10,000 cap imposed as part of the Tax Cuts and Jobs Act, a number of state governments have proposed or enacted legislation that would allow taxpayers to make charitable contributions to an established state fund in order to earn a credit. The goal would be to allow residents to take the full amount given as a deduction.
However, the IRS blocked that strategy through guidelines issued on Thursday, which require taxpayers to subtract the value of their state and local tax deductions from their charitable contributions.
The guidelines do not distinguish between programs established before the tax overhaul went into effect and those developed by high-tax states, like New York and California, in the wake of its implementation.
The reduced cap for SALT deductions 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 Democratic member of the California State Senate.
In November, U.S. Treasury Secretary Steven Mnuchin said he hoped initial proposals to eliminate SALT deductions altogether would encourage change among lawmakers in high-tax states.
“I do hope that this sends a message to the state governments that, perhaps, they should try to get their budgets in line,” Mnuchin said during a speech at the Economic Club of New York. “And the question is: Why do you need 13% or 14% state taxes?”