High-tax New York towns to battle IRS over SALT cap workaround

A group of towns and cities in New York are preparing to fight the Internal Revenue Service after the agency issued guidance that would block a workaround to circumvent the cap on state and local tax deductions (SALT), the Wall Street Journal reported.

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The coalition of municipalities will file public comments with the IRS and is also considering a lawsuit, a local assemblywoman told the Journal.

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.

New York state lawmakers approved a bill in March that would allow taxpayers to receive a credit against their state income tax for up to 85 percent of a charitable donation.

However, the Treasury Department issued guidance in August that would require taxpayers to subtract the value of their state and local tax deductions from their charitable contributions. Fourteen municipalities in New York have already set up charitable funds, the Journal reported.

The IRS 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.