IRS Warns of Future Regulations Preventing State SALT Cap Workarounds

The Tax Cuts and Jobs Act (TCJA), a sweeping tax reform bill enacted at the end of 2017, included a $10,000 cap on state and local tax (SALT) deductions for married filers. This cap impacts predominantly high-tax states, such as California, New York, New Jersey, and Connecticut, and has prompted legislators to seek workarounds for their constituents. However, the IRS indicated in a recent notice that it will not tolerate states’ attempts to circumvent the SALT cap.

In the wake of the passage of the TCJA, a number of states began to draft legislation that would allow taxpayers to earn credit against their SALT by making payments to state or local municipal charitable organizations. In this situation, the taxpayer’s nondeductible SALT payment is made as a deductible charitable contribution, thereby circumventing the $10,000 SALT deduction cap.

In reaction to attempts at a workaround, the IRS released Notice 2018-54, “Guidance on Certain Payments Made in Exchange for State and Local Tax Credits” on May 23, 2018. The document warns that the Department of Treasury and the IRS “intend to propose regulations addressing the federal income tax treatment of certain payments made by taxpayers for which taxpayers receive a credit against their state and local taxes.”

While no further guidance has yet to be released, taxpayers should be cautious about counting on a SALT cap workaround. As always, please reach out to your DeLeon & Stang tax advisor with any questions or concerns.