Anger over the new Tax Cuts and Jobs Act's limits on federal tax deductions for state and local taxes (SALT) has spilled over into 2018, with lawmakers from high-tax states still looking for ways to undo this provision. Some have petitioned the Internal Revenue Service for revised, more filer-friendly property tax guidance. Other have introduced legislation to fully restore the now-limited SALT itemized write-offs.
You thought the battle over paying 2018 local property taxes so that they could be claimed on 2017 tax returns ended on Jan. 1.
You were wrong.
Asking IRS to reconsider: Sen. Chuck Schumer, Senate minority leader, wants the Internal Revenue Service to rescind its recent late-2017 guidance that appeared to prevent many homeowners from claiming their 2018 property taxes they prepaid by Dec. 31, 2017.
Many people did so anyway in the hopes of claiming the full 2018 amounts on their 2017 taxes before they are limited this year by the Tax Cuts and Jobs Act (TCJA) cap of $10,000.
Democrat Schumer represents New Yorkers, many of whom in urban areas will be hit hard by the state and local taxes (SALT) federal itemized deduction limitation.
The IRS on Dec. 27, 2017, announced that prepaid 2018 real estate taxes were not deductible unless the taxpayer had already received an assessment of 2018 real property taxes. However, that IRS also left the determination of property assessment to the local governing officials.
That notice and the "hastily written tax law" upon which it is based has left his Empire State constituents confused and need clarity, wrote Schumer in a Jan. 16 letter to Acting IRS Commissioner David Kautter.
Specifically, Schumer urged Kautter to revise its prior property tax payment guidance.
Hasty, confusing law, interpretation: The changes to one of the oldest portions of federal tax law "was agreed to last minute in a secretive partisan conference agreement," Schumer wrote. By the time the final law was enacted on Dec. 22, 2017, that left taxpayers only nine days before the SALT deduction cap took effect.
Thousands of New Yorkers prepaid their 2018 property taxes in those nine days, Schumer wrote, "with the understanding that they could deduct these property taxes from their federal taxes in 2017, before the new cap was imposed."
"Many state and local government did not have time in these nine days, which fell in the middle of a holiday break for many, to react to this new law and accept prepaid property taxes," Schumer noted. New York's governor, however, was among the handful who did move expeditiously to authorized local governments to accept prepayments.
That move, Schumer told Kautter, was made with a fair interpretation of the new law. That interpretation has been challenged by the IRS guidance.
Schumer argues that the TCJA's legislative text does not support the IRS' late-December guidance suggesting that certain property taxes paid in the calendar year 2017 would not be deductible against federal income taxes in the year they were paid.
True, the law explicitly prohibited 2018 state and local income taxes from being prepaid and deducted from federal income taxes in 2017, it did not include language on the prepayment and deduction of property taxes, wrote Schumer.
The tax code says that state and local personal property taxes that were "paid or accrued" shall be allowed as a deduction for the taxable year, noted Schumer, adding, "The new tax law does not change this."
"The exclusion of property taxes may or may not have been intentional given the secretive and rushed process that this legislation underwent to become law," wrote Schumer. "Nevertheless, the legislative text does not prohibit the deduction of prepaid 2018 state and local property taxes accrued in 2017."
"Again, I urge IRS to rescind their recent guidance, which is not supported by the law, and clarify that taxpayers are allowed to deduct their prepaid 2018 property taxes to state and local governments in 2017, independent of whether they were assessed in 2017," the N.Y. lawmaker told the IRS.
Prior letter, same request: Schumer's is the latest, but the only Congressional effort to fight the IRS interpretation of the TCJA limits on state and local taxes deductions.
Eleven other Democrats from high-tax states, including a pair serving on the Congressional tax writing panels, also have taken action to fight TCJA limits.
Senate Finance Committee member Sen. Robert Menendez and House Ways and Means Committee member Bill Pascrell, were part of a group of Garden State Democrats who on Jan. 9 sent their own letter to Kautter, telling the acting tax agency head that the IRS misread the text of the new tax law.
The IRS guidance, wrote the nine* Garden State members of Congress, "is nothing but a backdoor attempt to retroactively implement the cap on state and local tax deductions and it is not supported by law. As such, we ask that you rescind the flawed guidance and appropriately treat property tax payments made in 2017 as fully deductible against 2017 federal income tax liability."
*Other Democrats from the New Jersey Congressional delegation who joined Menendez and Pascrell in signing the property tax deduction letter were Sen. Cory Booker and Reps. Frank Pallone, Josh Gottheimer, Bonnie Watson Coleman, Donald Norcross, Albio Sires and Donald Payne, Jr.
These lawmakers, beat Schumer to the punch in asking Kautter to "rescind the flawed guidance and appropriately treat property tax payments made in 2017 as fully deductible against 2017 federal income tax liability."
SALT repeal bills, too: A bipartisan New York duo, Reps. Nita Lowey (Democrat with a constituency in Rockland-Westchester) and Peter T. King (Republican representing Nassau-Suffolk) went beyond correspondence and introduced legislation that would restore the SALT full deduction.
Lowey and King said their Securing Access to Lower Taxes by Ensuring Deductibility Act — or, true to D.C.'s love of acronyms, the SALT Deductibility Act — was prompted by the fact that 35 percent of New York residents deduct an average of more than $22,000 every year.
"By effectively eliminating this deduction, the new federal tax law unfairly punishes families living in states that send more money to the federal government than we get back in federal investments," said Lowey and King.
Another bipartisan SALT bill also has been introduced by Gottheimer, a Democratic signer of the letter to the IRS from members of the N.J. delegation, and his GOP N.J. colleague Rep. Leonard Lance. The bill, the Cutting Local Taxes by Reinstating SALT Act (H.R. 4789), is pulled from Gottheimer's separate tax cut plan.
H.R. 4789 would restore the state and local tax deductions to what was in place before the latest legislation was enacted.
"No taxpayer should have to pay taxes on taxes. The state and local tax deduction should be restored in its entirety. It has been in the tax code since 1913 and is a matter of fundamental fairness under the concept of federalism," said Lance.
Little chance … for now: I appreciate these lawmakers' commitment to their constituents and, in the case of the Democrats involved in the SALT efforts, to their Party's opposition to the new Republican tax law and its state tax deduction limitations.
In the spirit of full disclosure, I really, truly personally appreciate the efforts since home values in my area of Austin, Texas, are outrageous, leading to high property taxes in our non-income tax states. And my GOP lawmakers don't seem concerned about this, which affects voters in other parts of this red state and not just the blue dot that is Austin.
I doubt, however, they will have much success in persuading the IRS to revise its ruling or their House and Senate colleagues to support legislation to revise TCJA at this early stage of its life.
But you can be sure that if the midterm elections produce a substantive change to the political make-up of either or both Congressional chambers, SALT tax matters will be at the top of a new legislative to-do list.
And these letters and legislation are already in as place makers.
You also might find these items of interest:
- Tax reform's $10K property tax deduction is worthless
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- New IRS withholding tables reflect lower tax rates, but most people probably will get refunds next year