Each year, thousands of professionals use their creativity and ingenuity to try to figure out the best ways to lower your federal taxes. You know you’re living in interesting times when state lawmakers join that crowd.
The reason they’re working so hard is something popularly known as the SALT provisions of the new Tax Cuts + Jobs Act, which set a firm $10,000 limit on the deductibility of state and local taxes. This matters for residents of states that have state income taxes, who generally pay far more than $10,000 to the state alone, on top of the property and municipal taxes they’re assessed.
Those higher-tax states are now using that aforementioned creativity and ingenuity to help their citizens get back those deductions. For instance, New York has already begun allowing taxpayers to, instead of paying their local property taxes, simply make a comparable charitable contribution to a charity set up by their local school district. Presto! What used to be a tax is now a charitable contribution that would be deductible for taxpayers who itemize. The state would also allow New York City and other municipalities to set up their own charitable trusts, converting local taxes into deductible charitable contributions as well.
Not to be outdone, New Jersey and Connecticut are attempting to reclassify state taxes as charitable contributions, while New York plans to allow taxpayers to convert their state income tax into a payroll tax, which their employers would pay on their behalf—and then deduct from their federal tax bill.
Is any of this legal? We don’t know yet. The IRS has recently issued a broad warning against states’ creative use of charitable contributions, and it never helps a future tax court case when lawmakers openly tout their intentions to evade the federal SALT provisions when they introduce state legislation. But tax experts note that the IRS has provided favorable rulings in more narrow cases regarding the federal deductibility of state tax credits in 33 states.
This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice, and any opinions expressed are solely those of the writer. Past returns do not guarantee future returns.