IRS may nix blue states’ workaround on tax deduction caps

Personal Finance


A number of high-tax states have recently passed legislation to help residents manage new caps on their ability to take federal tax deductions.

However, accountants are warning taxpayers to proceed with caution.

This year, the Tax Cuts and Jobs Act put in place a $10,000 cap on the amount of state and local taxes (SALT) that filers can claim on their taxes.

Residents in high-tax locales can expect to feel the pain: In 2015, the average New Yorker’s SALT deduction was $22,169, according to the Tax Policy Center. In New Jersey and Connecticut, those amounts were $17,850 and $19,665, respectively.

In response to the new tax code, those three states passed laws to create a workaround: Municipalities will be permitted to establish charitable funds to pay for local services and offer property tax credits to incentivize homeowners to make contributions.

New York Gov. Andrew Cuomo signed off on this legislation on April 17. New York has also enacted a new voluntary payroll tax to address workers’ inability to exceed the cap on their income taxes.

On May 4, New Jersey Gov. Phil Murphy signed legislation to permit cities and towns in the Garden State to move forward on the charitable fund strategy.

And Connecticut lawmakers approved the state’s bill for a similar measure on May 9. The measure awaits the signature of Gov. Dannel P. Malloy.



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