Tax Update: SALT and Charitable Deductions

One of the most controversial changes that was part of the Tax Cut and Jobs Act of 2017 passed last December was concerning the deduction of state and local income taxes, more commonly known as SALT.

Prior to the December change, taxpayers were able to deduct from their federal taxes all ofthe state and local taxes they paid.  Usually state and local taxes include personal income tax, corporate income tax, sales tax, and property tax. These taxes are in turn used to pay for  public services such as public schools, police protection, health and welfare benefits, and the operation of the state government. In high property tax states like NJ, NY, CT, and CA being able to deduct SALT was a great benefit and the main reason why some taxpayers itemized on their tax return versus taking the standard deduction.

As part of the new tax law the federal SALT deduction is now capped at $10,000.  That means even if your property taxes on your residence are $25,000 you would only be allowed to take a deduction of $10,000 on your tax return.  And that’s not counting what you paid in state income taxes.

The high tax paying states aren’t sitting back idly and are trying to figure out a way around this new cap on SALT deductions.  They are going to try the Charitable giving route. There was no change to amount of your charitable giving you can deduct. You are still able to deduct the full, unlimited amount that you give to charity.  NJ passed a law that allows municipalities to set up “charitable funds” to accept the taxes that homeowners would have paid for property taxes. The municipalities would then use the money deposited into the “charitable fund” and fund the services that the property taxes would have been used for.  Problem solved. Taxpayers get the full deduction and the municipalities still get use of the money to fund the services they provide.

Not surprisingly the federal government says not so fast.  The U.S Treasury Department and Internal Revenue Service claim that they have the final say on whether contributions to charitable funds in lieu of property taxes will be fully deductible.  The IRS came out with an announcement that stated “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.”  If the IRS disallows the New Jersey “charitable fun” move, it will likely wind up in the courts.