STREAMING NOW: Watch Now

IRS may have just poured cold water on state efforts to skirt SALT deduction cap

Several states this year have moved to let residents circumvent the new $10,000 fed...

Posted: May 24, 2018 8:49 AM
Updated: May 24, 2018 8:49 AM

Several states this year have moved to let residents circumvent the new $10,000 federal cap on state and local tax deductions.

But the IRS issued a notice on Wednesday that may give taxpayers in those states pause.

The new cap on state and local deductions mostly affects taxpayers in states with high income and property taxes like New York, New Jersey, Connecticut and California.

New York was first out of the gate, approving a measure that lets taxpayers make charitable contributions to state-run funds financing education and healthcare. Taxpayers can get a state tax credit worth 85% of their contribution. And they could deduct 100% of their contribution on their federal return, since there is no cap on charitable deductions.

That's the idea anyway.

Similar proposals have been considered or passed in California, New Jersey and other states.

But the Treasury and IRS may rule against that strategy in proposed regulations that the agencies said they will issue "in the near future."

Those regulations "will make clear that the Internal Revenue Code, not the label used by states, governs the federal income tax treatment of such transfers."

In other words, stay tuned, we'll let you know if we plan to treat your contributions to a state-run fund as deductible charitable donations.

Related: New York OKs plan to skirt controversial provision of the GOP tax

Steven Rosenthal, a tax lawyer and senior fellow at the Tax Policy Center, wouldn't be surprised if the IRS rules against the strategy, but notes it's a sticky issue since the IRS and the courts have supported the full deductibility of charitable contributions to state funds in the past.

"If the IRS thought [the issue was] noncontroversial, they wouldn't have issued the notice," Rosenthal said. "They want to send a signal as a legal and a practical matter."

And that signal seems to be a red light.

"It is clearly designed to dissuade taxpayers in states like New York from taking advantage of the legislation that recently passed," said Daniel Rosen, a partner at Baker McKenzie and a former special trial attorney for the IRS.

It's highly unusual that Wednesday's notice doesn't explicitly state the IRS' position, Rosen said.

That suggests to him there is no consensus yet as to how the agency should rule because it faces a dilemma: How can it make the case that blue state efforts to circumvent the SALT cap are wrong without also ruling that other states are wrong to let residents make federally deductible contributions to state funds in exchange for state tax credits.

Kirk Stark, a tax law professor at UCLA who's written extensively on this issue, said in an email to CNN that it's too early to tell what the IRS will do, but that new regulations will take some time, and likely could end up being challenged in court.

New York State Governor Andrew Cuomo, who has described the SALT deduction cap as an "economic missile" launched by Republicans on Democratic states, made clear Wednesday afternoon the state won't just roll over.

"We will continue to fight .... The IRS should not be used as a political weapon, and I urge this administration to stop its partisan assault on New Yorkers and instead work with us to deliver real, lasting relief for hardworking families."

Minnesota Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 24850

Reported Deaths: 1050
CountyConfirmedDeaths
Hennepin8393613
Ramsey3019124
Stearns202113
Nobles15395
Anoka139970
Dakota132755
Washington63632
Olmsted62610
Kandiyohi4961
Rice4622
Scott4262
Clay42328
Mower3182
Todd3160
Wright3131
Sherburne2432
Carver2102
Benton1773
Steele1580
Blue Earth1400
Martin1305
St. Louis11814
Freeborn1170
Pine890
Unassigned8910
Nicollet8710
Winona7915
Cottonwood750
Watonwan740
Carlton730
Crow Wing712
Otter Tail680
Goodhue663
Chisago611
Polk612
Lyon560
Itasca5410
Dodge520
Chippewa511
Morrison460
Meeker450
Le Sueur441
Douglas420
Becker400
Jackson390
Murray390
McLeod370
Isanti350
Waseca260
Rock220
Mille Lacs191
Pennington190
Faribault180
Swift180
Wabasha180
Fillmore171
Brown162
Sibley160
Beltrami150
Cass142
Norman130
Marshall120
Pipestone120
Kanabec111
Wilkin113
Wadena100
Pope90
Aitkin80
Koochiching80
Mahnomen61
Yellow Medicine60
Lincoln50
Redwood50
Big Stone50
Renville50
Red Lake40
Grant40
Lac qui Parle30
Clearwater30
Traverse30
Houston20
Hubbard20
Roseau20
Lake10
Kittson10
Stevens10

Iowa Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 19521

Reported Deaths: 535
CountyConfirmedDeaths
Polk4227126
Woodbury275034
Black Hawk174644
Linn95577
Dallas90421
Marshall89416
Buena Vista7830
Johnson6149
Wapello59310
Muscatine55741
Crawford5162
Tama40327
Scott35910
Dubuque34418
Louisa34411
Sioux2750
Pottawattamie2638
Jasper26016
Washington1898
Wright1690
Plymouth1322
Warren1320
Allamakee1214
Story1151
Mahaska9410
Poweshiek908
Henry711
Bremer706
Des Moines631
Boone620
Clinton611
Taylor560
Clarke550
Guthrie503
Cedar471
Benton431
Webster401
Monroe385
Shelby370
Hamilton370
Jones360
Clayton353
Buchanan330
Iowa330
Osceola330
Marion320
Cerro Gordo291
Madison282
Cherokee280
Lee270
Fayette270
Jefferson270
Lyon240
Monona240
Winneshiek240
Harrison230
Davis220
Dickinson210
Grundy200
Mills190
Floyd191
Sac190
Humboldt180
Hardin170
Lucas170
Clay160
Butler161
Hancock160
Delaware150
Emmet150
Keokuk150
Appanoose153
Ida140
Franklin130
Page130
Greene130
Howard120
Cass120
Audubon121
Pocahontas120
Jackson120
Winnebago110
Carroll100
Chickasaw100
Kossuth90
Adair90
Van Buren90
Union80
Adams70
Montgomery70
Palo Alto60
Fremont40
Mitchell40
Ringgold40
Worth30
Calhoun20
Wayne10
Decatur10
Unassigned10
Rochester
Overcast
64° wxIcon
Hi: 85° Lo: 69°
Feels Like: 64°
Mason City
Broken Clouds
61° wxIcon
Hi: 88° Lo: 68°
Feels Like: 61°
Albert Lea
Overcast
57° wxIcon
Hi: 87° Lo: 69°
Feels Like: 57°
Austin
Overcast
63° wxIcon
Hi: 89° Lo: 69°
Feels Like: 63°
Charles City
Overcast
61° wxIcon
Hi: 86° Lo: 67°
Feels Like: 61°
Powerful storms and summer-like conditions are coming our way
KIMT Radar
KIMT Eye in the sky

Latest Video

${item.thumbnail.title}

StormTeam 3: Tuesday's Severe Weather Outlook

Image

Minnesota churches open doors to more congregants

Image

George Floyd protests continue in Austin on Sunday

Image

Sean Weather 5/31 2

Image

Rochester restaurant prepares to open patio to public

Image

Sean Weather 5/31

Image

Rochester People's Rally

Image

Religious leaders call for justice for George Floyd

Image

Rochester downtown under curfew Saturday night

Image

Sean Weather 5/30

Community Events