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States Developing “Solutions” to the New $10,000 Cap on Individual Taxpayers’ State and Local Tax Deductions

States Developing “Solutions” to the New $10,000 Cap on Individual Taxpayers’ State and Local Tax Deductions

The TCJA imposes a new $10,000 cap on taxpayers’ deduction of state and local taxes (e.g., income and property taxes).  Several states, particularly those with high state-level taxes, have begun to develop workarounds to that limitation.  These “solutions” are at various stages in the legislative process but include the following:

  • New York:  State-operated charitable funds that allow taxpayers to claim a state tax credit equal to 85% of their donation to health and education funds.
  • New Jersey:  Permits municipalities, counties, and school districts to establish charitable funds and allow donors to receive property tax credits in exchange for their donations.
  • Illinois:  Allows taxpayers to contribute state and local taxes that exceed the $10,000 cap to the Illinois Excellence Fund and receive a credit in exchange.
  • Connecticut:  Creates a 200% income tax deduction for contributions to a special account to benefit state residents who have had their social service program benefits reduced because of state budget limits.

Despite the states’ optimism regarding their “solutions,” many tax lawyers, practitioners, and most importantly, IRS and Treasury officials believe such workarounds will not stand up to IRS scrutiny.  Specifically, they have indicated that a taxpayer who claims a charitable deduction in lieu of an otherwise nondeductible state tax can expect a successful challenge from the IRS.  Tax law has long held that taxpayers cannot deduct as a charitable contribution a payment for which they receive a benefit in return.  Stay tuned as states wrestle with this conundrum.

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Christenson_Crystal
Crystal Christenson, CPA, MST
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