Treasury and IRS move to block blue states’ tax workarounds

Andrew Harrer | Bloomberg Getty Images

Steven Mnuchin, U.S. Treasury secretary, speaks during the SelectUSA Investment Summit in National Harbor, Maryland, U.S., on Thursday, June 21, 2018. 

The Treasury and IRS have issued new rules that will block blue states’ attempts to circumvent the new $10,000 cap on state and local tax deductions.

The proposed regulation was released Thursday afternoon.

The $10,000 limit on the so-called SALT deduction was part of the Tax Cuts and Jobs Act, an overhaul of the tax code, which was passed last year.

New York, New Jersey and Connecticut — among the states with the highest property taxes — had put legislation in place to help taxpayers bypass the limit on the deduction.

Those plans included permitting municipalities to set up charitable funds and allow taxpayers to contribute to them.

“Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families,” said Treasury Secretary Steven T. Mnuchin, in a statement.

“The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions,” he said.

In addition to permanently trimming the top corporate rate to 21 percent from 35 percent, lawmakers also slashed rates on individuals across the board and roughly doubled the standard deduction — but those changes are in effect only from 2018 to the end of 2025.

The new tax law also eliminated personal exemptions and cut most deductions. Though the SALT deduction remained, the $10,000 limit means that homeowners in states with the highest property taxes and home values will feel the brunt.

In 2015, the average SALT deduction for New Yorkers who claimed the break was more than $22,000, according to the Tax Policy Center. In New Jersey, the average deduction was around $18,000.

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