The Internal Revenue Service (IRS) is warning states like New Jersey that it will not allow them to use charitable deductions to get around the cap on State and Local Tax (SALT) deductions.

The agency issued a notice yesterday stating “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 warning was contained in a notice that the IRS and the U.S. Department of the Treasury intend to propose regulations addressing the federal income tax treatment of certain charitable contributions for which taxpayers receive a credit against their state and local taxes. What exactly those regulations will or will not allow will not be known until they are made public, the statement has been taken as a warning by most observers.

The Tax Cuts and Jobs Act (TCJA) limited the amount of state and local taxes an individual can deduct in a calendar year to $10,000, a provision that penalizes many taxpayers in states like New Jersey, where taxes routinely exceed that cap. Earlier this year, New Jersey enacted such a work-around.

The IRS statement said only that the regulations would be issued “in the near future.” Updates on the implementation of the TCJA can be found on the Tax Reform page of IRS.gov.

“While we commend the Murphy administration for looking for opportunities to protect New Jersey’s property tax payers who are being hurt by the SALT changes, we must also be looking for comprehensive property tax reforms at this time,” said NJBIA President and CEO Michele N. Siekerka, Esq. “We must establish a plan for how we sustainably fund education in New Jersey and how we carry out local and county government in a way that brings relief from the high cost of New Jersey property taxes.”

5 responses to “IRS Issues Warning on SALT Deduction Workaround”

  1. Manfred Mann says:

    Here’s a novel idea: instead of raising taxes, how about cutting expenditures, audit all state agencies, cut back on lush union benefits and freeze the defined benefit plan and replace it with a 401K?

    • David says:

      One of the few things Corzine proposed would help: Get rid of HOME RULE. This would: 1) eliminate redundancies of services
      2) eliminate redundancies of management (for example the thousands of school superintendents making six figure salaries)
      3) would enable better ability to negotiate for things like insurance
      4) would enable government to better negotiate standard expenses from cars to pencils because of the increased volume.
      And this is just the start!

      • Thomas says:

        There are as many ideas to cut taxes and curb spending as there are politicians. Unfortunately there is little in analytical thought to support them.

        Town budgets are controlled by local officials, many who aren’t competent to manage their own finances, let alone a multi-million dollar municipal budget. And while eliminating home rule sounds great, it undermines one of the attractions of living in suburbia; the ability to affect a community’s character.

        Maybe a starting point would be to consolidate the various school systems under one umbrella, considering the State plays with their funding formulas. School budgets in many small towns represents over 50% of their municipal budgets; and school boards are rarely fiscally minded.

        The federal tax law change should hopefully force State legislators to open their eyes; to see that blind spending without realistic funding sources is only a version of fiscal cancer. The new tax law is possibly the chemo, an agent that riles property taxpayers to be more conscious of political rhetoric.

  2. Eric Berger says:

    Paying a nonprofit who passes along the money to pay real estate taxes isn’t charity because you get something of value in return. Converting the income tax on wages to a payroll tax on employers would circumvent the cap plus allow most residents to avoid having to file a NJ tax return plus simplify collection and review for Division of Taxation. Employers tend to be in higher tax bracket making Federal deduction more valuable.
    Employers would reduce wages to cover this outlay net of tax savings.

  3. Scott Lauri says:

    The NJ SALT workaround to treat property taxes as a charitable donation did that also create a workaround for the NJ limit on property taxes?