Treasury, IRS to Release Regulations on SALT Workarounds

Filed in Codes and Standards by on May 23, 2018 0 Comments

 arrow on whiteThe Department of Treasury and Internal Revenue Service (IRS) have released Notice 2018-54, which announces their intention to propose regulations addressing state legislative proposals that create a workaround for the newly imposed limits to the state and local tax (SALT) deduction.

In plain language, the IRS is warning taxpayers that just because the state law permits them, it does not make the workaround deductible under federal tax law.

One of the significant changes included in the Tax Cuts and Jobs Act of 2017 limits the aggregate amount of state and local taxes that may be deducted on a taxpayer’s federal return to $10,000. This new limit takes effect for the 2018 tax year. Before this change, taxpayers faced no limitation on their SALT deduction.

The SALT deduction allows taxpayers who itemize their federal taxes to deduct their property taxes, along with their choice of either state and local income or sales taxes.

For states affected by the new cap, some have adopted or are considering legislative proposals to minimize the effect of the SALT limits. Specifically, New York, New Jersey and Connecticut have enacted SALT limit workarounds that allow their residents to contribute to state charities in exchange for a state tax credit, allowing them to effectively classify their state and local tax payments as a charitable contribution. Unlike the SALT deduction, there is no federal limit on deductions for charitable contributions.

The notice clearly indicates that Treasury and the IRS are moving to shut down these workarounds: “Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.”

The notice states that the purpose of the proposed regulations is to “…make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal tax treatment of such transfers.”

The Treasury and IRS intent to release their proposed regulations “in the near future.”  As with any proposed regulation, the public will have an opportunity to comment before the regulation is finalized.

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