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INTERNAL REVENUE SERVICE ISSUES WARNING TO STATES NOT TO CIRCUMVENT THE STATE AND LOCAL TAX CAP

June 14, 2018

INTERNAL REVENUE SERVICE ISSUES WARNING TO STATES NOT TO CIRCUMVENT THE STATE AND LOCAL TAX CAP

Commencing in 2018, as enacted under the Tax Cuts and Jobs Act of 2017, Congress provided that deductions for state and local taxes are to be capped at $10,000 per married couple. Many high tax states such as California, New York, New Jersey and Connecticut have considered that this was inequitable to their residents, and have passed or are drafting legislation which would allow taxpayers to make payments to state or local municipal charitable organizations in exchange for credit against their real estate or state and local taxes. This would enable the taxpayer to circumvent the $10,000 cap by converting an otherwise nondeductible tax payment to a deductible charitable contribution. On May 23 the Internal Revenue Service issued Notice 2018-54 which provided that the Treasury Department would issue regulations addressing the federal income tax treatment of transfers to funds (or other state specified transferees) that taxpayers could treat as satisfying state and local tax obligations. 

Many have questioned whether the efforts by the states to circumvent the state and local tax cap provisions would withstand legal challenge by the government. The notice clearly provides a warning that the Internal Revenue Service will take the position that such alternative provisions enacted by states will not be regarded as valid deductible charitable contributions. Many states will continue to enact provisions and maintain those laws already passed which circumvent the new federal legislation. Until further guidance is issued, taxpayers should proceed with caution as such contributions could be in jeopardy as a federal deduction. For more information contact us in one of our many locations.

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