The Trump administration announced Wednesday that it will move to block states from circumventing the new tax law’s $10,000 limitation on state and local tax deductions.
The IRS put out a two-page notice warning states that it would issue a rule to prevent them from skirting the cap by converting contributions to state and local governments from taxes to charitable giving. The Republican-passed tax law limited federal deductions for state and local taxes, but did not do so for charitable contributions.
“The proposed regulations will make clear that the Internal Revenue Code, not the label used by states, governs the federal income tax treatment of such transfers,” the Treasury said in a statement.
The notice is a response to blue-state governments that have tried to set up workarounds to prevent their residents, mostly high-income earners, from facing higher total tax bills because of the loss of the “SALT” deduction, as it’s known.
This month, New Jersey’s governor signed legislation letting local governments accept property taxes in the form of charitable contributions, which remain tax deductible at the federal level. States such as New York and California also have considered similar measures.
The IRS rule would mean that the charitable contributions to state and local government entities would not be deductible.
Proponents of the state-level workarounds to the SALT cap have argued that there is sufficient legal precedent for them to hold up, despite what the administration may do.
Kevin Brady, the Republican chairman of the Ways and Means Committee and an architect of the tax overhaul, welcomed the IRS’ move in a statement.
“There are many mayors and governors who do a good job of balancing budgets and creating jobs in their communities without high taxes,” the Texan said, “and I encourage those few states that are trying to undermine our growing economy to instead focus on how they can lower their own taxes on their constituents and keep moving our economy forward.”
