IRS, Treasury have set their sights on blue states’ tax workarounds

The Internal Revenue Service and Treasury Department will release new rules to address workarounds by high-tax states that are designed to help their residents manage new caps on federal tax deductions.

The IRS announced the move in a notice on Wednesday, without specifying details.

This year, the Tax Cuts and Jobs Act places a $10,000 cap on the amount of state and local taxes (SALT) that filers can deduct on their federal returns.

To help residents deal with the pain of losing that deduction, New York, New Jersey and Connecticut recently passed laws to create a workaround: Municipalities will be allowed to establish charitable funds to pay for local services and offer property tax credits to incentivize homeowners to make contributions.

In turn, filers who itemize can also claim a charitable tax deduction on their federal returns and do so beyond the $10,000 SALT cap.

The IRS has set its sights on these strategies.

“Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes,” the IRS wrote in its notice.

“It’s no surprise that the Trump administration is once again targeting Connecticut taxpayers,” wrote Leigh R.J. Appleby, press secretary for Connecticut Gov. Dannel P. Malloy, in an e-mail.

“The legislation proposed by the Governor and passed overwhelmingly by the General Assembly gives municipalities a workable option to ensure their residents aren’t double taxed because of the Trump/GOP tax law,” Appleby wrote.

“I remain committed to fighting the SALT deduction tax cap and am confident that the solution signed into law can and should be embraced by the IRS,” New Jersey Gov. Phil Murphy said in an e-mailed statement.

“Make no mistake: We have been and will continue to fight against this economic missile with every fiber of our being,” New York Gov. Andrew Cuomo said in an e-mailed statement.

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