Crackdown on SALT Deduction Workarounds

Thursday, May 24, 2018

The Internal Revenue Service and the Treasury Department said Wednesday they intend to issue proposed regulations to address the question of deductibility of state and local tax payments, as states begin to provide ways to expand the limits on the state and local tax deduction imposed by the new tax law.

In recent months, high-tax states such as New York, New Jersey, California and Connecticut have either passed or proposed laws allowing taxpayers to make payments to state-controlled funds in lieu of taxes as a way to get around the limits in the new tax law on the state and local tax deduction, also known as the SALT deduction. But in a new Notice 2018-54, the IRS and the Treasury made clear Wednesday that federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law.

The Tax Cuts and Jobs Act limited the amount of state and local taxes an individual can deduct in a calendar year to $10,000. The measure in the Republican-led tax law was widely seen as punishing so-called “blue states” controlled by Democrats where taxes are often higher than in GOP-dominated "red states." In response to this new limitation, some state legislatures have adopted or are considering legislative proposals allowing taxpayers to make payments to specified entities in exchange for a tax credit against state and local taxes owed, the IRS noted.

The upcoming proposed regulations will be issued in the near future, according to the IRS, to help taxpayers understand the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction of state and local taxes.

The IRS also warned that taxpayers should be aware it and the Treasury are continuing to monitor other legislative proposals that are being considered to ensure that federal law controls the characterization of deductions for federal income tax filings. For example, New York recently passed a law allowing employers to expand payroll taxes as an option for taxpayers who need the extra deduction.

The limitation imposed by the TCJA applies to taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2026. 

House Ways and Means Committee chairman Kevin Brady, R-Texas, who helped draft the new tax law, praised the move by the IRS and the Treasury Department to restrict efforts to get around the limits on the SALT deduction. “Our new pro-growth tax code is putting more money into the pockets of workers and families nationwide," he said in a statement Wednesday. "It’s unfortunate that some politicians are still trying to discredit this new economic momentum in defense of high taxes and stagnant growth. I applaud the Administration for responding to these gimmicks. There are many mayors and governors who do a good job of balancing budgets and creating jobs in their communities without high taxes, 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.”

By Michael Cohn for