Treasury blocks SALT deduction cap workaround

June 12, 2019

By Naomi Jagoda at The Hill on June 11, 2019

The Treasury Department and IRS on Tuesday issued final regulations aimed at preventing residents of largely blue states from circumventing the GOP tax law’s cap on the state and local tax (SALT) deduction.

The final rules come after Treasury issued proposed regulations on the topic last August.

The tax law <span class="rollover-people" data-behavior="rolloverpeople"><a class="rollover-people-link" href="" data-nid="261287">President Trump signed in December 2017 caps the SALT deduction — or the amount of state and local taxes someone can deduct from their taxable income on their federal tax return — at $10,000. The cap has been one of the most controversial provisions in the law, with politicians in high-tax, Democratic-leaning states arguing that it hurts many of their residents who previously were able to deduct higher amounts. Supporters, however, argue the cap helps to prevent the tax code from subsidizing high state taxes, and they note that most people in high-tax states still received a tax cut under the 2017 law.

Some Democratic-leaning states took steps or considered taking steps to try to get around the SALT deduction cap by passing legislation designed to convert state and local taxes to charitable contributions. Under the workarounds, taxpayers could donate to state and local funds and receive tax credits against their state and local taxes. The intention was for the taxpayers to then deduct the donations as charitable contributions on their federal returns, which aren’t capped.

But under the final regulations, taxpayers would be able to receive a federal deduction only for a charitable contribution amount that is greater than the amount of the tax credits they received. For example, if a taxpayer donated $1,000 to a state fund and received a 70 percent credit against his or her state taxes, the taxpayer could claim a federal charitable tax deduction of only $300, Treasury said.

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