Final Regs Zap $10,000 Annual SALT Limitation Workaround
Jun 25, 2019
Richard L. Fox, Jonathan G. Blattmachr, Martin M. Shenkman
The Internal Revenue Service just issued final regulations (final regs) which,
consistent with the proposed regulations (proposed regs) issued last year, foreclose
using charitable contributions as a workaround to circumvent the limitations on
state and local taxes (SALT). The Joint Committee on Taxation estimated that the
limitation on state and local tax deductions, along with certain other reforms of
itemized deductions, would raise $668 billion over 10 years. The SALT limitation
provided a significant part of the funding for other tax cuts created under the Tax
Cuts and Jobs Act. So, the IRS had to have been expected to protect that revenue
stream, and it did. Only about 5% of taxpayers will have their state income tax
deduction limited by the new SALT restrictions. But for that 5% of taxpayers
affected, the impact will be costly.
The Act reduced or eliminated most itemized deductions from 2018 to 2026.
Itplaced an annual $10,000 ($5,000 for married persons filing separately) limit on
the deductibility of SALT payments under new Internal Revenue Code Section
164(b)(6). This new limitation prompted a number of states and political
subdivisions to adopt legislation allowing residents to avoid the new $10,000 SALT
cap by providing a credit against state and local taxes for contributions to certain
charitable organizations recognized by state and local governments that support
government functions. The purpose of such legislation was to recast non-deductible
SALT payments as contributions that would be fully deductible under IRC Section
170(a) (once the new doubled standard deduction was exceeded).
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