Lawmakers in high-tax states are looking for ways to circumvent the newly-imposed cap on the popular state and local tax (SALT) deductions, which have allowed residents to save billions on their federal tax bills.
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The recently-approved GOP tax law caps SALT deductions at $10,000, which is well below the average amounts claimed by individuals residing in states like New York, California and New Jersey. The average deduction claimed in California, for example, is $22,000, according to Kevin de Leon, a member of the California state senate.
In order to preserve SALT benefits for constituents, de Leon has proposed a bill 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 the resident to take the full amount given as a deduction. The proposal is scheduled to be introduced into the state legislature this month.
That strategy, however, could run into challenges based on the Internal Revenue Service’s (IRS) definition of a charitable contribution, as the taxpayer would expressly benefit from the donation, Tom Landstreet, founder and CEO of N3L Capital Partners, told FOX Business.
In New York, Democratic Gov. Andrew Cuomo issued an emergency executive order at the end of last year, allowing residents to prepay property taxes to receive the deduction. He is also believed to be considering a workaround that would shift tax burdens so that his state’s residents wouldn’t lose out on income tax deductions. Known as an employer-side payroll tax, employers would essentially pay income taxes to the state, which are deductible, on taxpayers’ behalf. Workers would receive a taxable income that would be the same as if they could claim the SALT deduction. Therefore, this could entirely eliminate the bill’s impact on state income taxes.
While beneficial for taxpayers in certain states, these policies could jettison the entire intention behind Republicans’ desire to reduce SALT benefits.
“The SALT cap, it forces those governors … to actually have to start [cutting tax rates and spending]. A very overdue discipline that they need,” Landstreet said. “What [these workaround proposals show] is how creative these greedy politicians can get to protect their fiefdoms.”
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?”