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Tax Cuts and Jobs Act: Deducting State and Local Taxes as Charitable Contributions - IRS Says Not So Fast

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On Wednesday, May 23, 2018, the IRS issued Notice 2018-54 stating that the Service intends to provide regulations addressing legislation in some states that attempts to circumvent the new limitations on the federal deductibility of state and local taxes (SALT). As many of us know (especially those of us in high tax states), the Tax Cuts and Jobs Act of 2017 (TCJA) includes a $10,000 limitation on the deduction of state and local taxes (including both property and income taxes) for tax years beginning after December 31, 2017, and ending before January 1, 2026.

Some states already have or are considering workarounds for the limitation, allowing taxpayers to make payments to state and local government funds in exchange for credits against their state and local tax liabilities. The intention of the states is for taxpayers to receive a charitable contribution deduction on their federal tax returns for the payments made to these state and local funds. The notice issued by the IRS states that the regulations will make it very clear that the federal law governs the federal income tax treatment of SALT payments and the IRS will apply substance-over-form principles.

Many taxpayers, especially those in higher tax states such as New York and New Jersey, were hoping there would be a chance for a federal deduction with the workarounds proposed. Unfortunately, it doesn’t appear as though they’ll be in luck after the issuance of IRS Notice 2018-54.

The IRS hasn’t provided a timeframe for issuing the regulations. We encourage you to contact your Marcum tax advisor if you have any questions regarding the deductibility of your state and local taxes.

 
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