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Posted on: July 19, 2019

NJ Sues Federal Administration over IRS’ SALT Workaround Regulations

This week, Governor Murphy and State Attorney General Gurbir Grewal announced that New Jersey has joined with New York and Connecticut to sue the federal government, challenging IRS rules related to certain workarounds to the $10,000 cap on state and local tax deductions. A copy of the compliance is available on the State’s website.

As you may be aware, the 2017 Tax Cuts and Jobs Act capped the federal income tax deduction for state and local taxes at $10,000. At the onset, there was concern from states like NJ and others that rely on property taxes more so than other revenue sources, that a cap would have a tremendous negative impact as it could result in driving down property values, among other things.

In response, many states including NJ endeavored to come up with ways to blunt the negative impact of the SALT deduction cap. In May of 2018, Governor Murphy signed into law P.L. 2018, c.11 which authorized counties, school districts and municipalities to set up charitable funds which property taxpayers could donate to and in return would receive a credit on their property tax bill of up to 90% of the donation. This was labeled as a workaround for the new SALT deduction cap as under federal tax law deductions for charitable contributions remained uncapped. The idea was to re-categorize SALT payments as charitable contributions so taxpayers could once again deduct the full amount of their SALT payments on their federal income tax returns.

Seeing that many states were adopting these workarounds in response to the SALT cap, the Federal Administration, through the IRS, scrambled to prevent a key portion of the 2017 Tax Cut and Jobs Act from being undermined. And, in June, the IRS issued regulations that would effectively end these workarounds by disallowing charitable contributions from being deducted from federal income taxes whenever the contributor received in return credit for taxes at the state or local level.

The lawsuit announced this week challenges IRS authority to issue these regulations.  It also challenges the reasoning behind the regulations, which overturn years of previous IRS guidance on the deductibility of charitable contributions when a tax credit is issued.

 We will be sure to keep our members updated on this lawsuit as it proceeds through the courts.

 Contact: Frank Marshall, Esq., League Staff Attorney, fmarshall@njlm.org, 609-695-3481 x137.


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