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States continue court fights over SALT deduction limit

Schedule A1
Current state and local taxes deduction limit on federal Form 1040 Schedule A.

We're wrapping up the second full year of living with the Tax Cuts and Jobs Act (TCJA) but some things still feel unfinished.

Treasury and the Internal Revenue Service continue to issue guidance on various provisions, tax forms still are being tweaked, economists can't agree on the tax bill's economic effects and a key legal battle is still raging.

The courtroom drama is about, you guessed it, TCJA's $10,000 limit on state and local taxes itemized federal deductions.

Fighting a low-SALT tax diet: In July 2018, New York, Connecticut, Maryland and New Jersey sued Treasury Secretary Steven Mnuchin and the IRS arguing that the tax bill's limitation was, per the court filing, was "an unconstitutional assault on states' sovereign choices."

U.S. District Judge J. Paul Oetken dismissed the suit on Sept. 30. The Manhattan-based judge said the states did not show that the SALT cap was unconstitutionally coercive or that it imposed on their own sovereign rights.

"The Court recognizes that the SALT cap is in many ways a novelty," Oetken wrote in his opinion. "But the States have failed to persuade the Court that this novelty alone establishes that the SALT cap exceeds Congress’s broad tax power under Article I, section 8 and the Sixteenth Amendment."

"To be sure, the SALT cap, like any other feature of federal law, makes certain state and local policies more attractive than others as a practical matter. But the bare fact that an otherwise valid federal law necessarily affects the decisional landscape within which states must choose how to exercise their own sovereign authority hardly renders the law an unconstitutional infringement of state power," wrote Oetken.

Basically, the judge added, "states remain free to exercise their tax power however they wish."

SALTy court fight continues: New York, Connecticut, Maryland and New Jersey disagree. And Thanksgiving week, the states announced they will continue their courtroom efforts to overthrow the tax deduction cap. A notice of appeal was filed Nov. 26 with the U.S. Court of Appeals for the Second Circuit.

New York Gov. Andrew Cuomo and the state's Attorney General Letitia James announced the continuing legal action.

Cuomo characterized the tax provision as "retribution politics, plain and simple," adding, "We will continue to fight this unconstitutional assault until it is repealed once and for all."

New Jersey Attorney General Gurbir S. Grewal cited tax history in his statement on the appeal.

"Throughout U.S. history, no federal tax law violated the interests of states by capping the federal income tax deduction for SALT at such a low amount," said the Garden State's top lawyer in a statement. "In fact, in America's 243 years of existence, the U.S. government has always provided a deduction for all or a significant portion of state and local taxes."

State taxpayers' costs: All the state officials have consistently pointed to the costs their residents face due to the SALT limit.

"The SALT deduction cap is a politically motivated tax hike that will cost Connecticut taxpayers $2.8 billion each year. We are aggressively pursuing this appeal and will continue to fight to protect our taxpayers from Trump's discriminatory and abusive money grab," said Connecticut Attorney General William Tong.

In Maryland, 45 percent of the Old Line State's taxpayers benefited from the deduction in 2014, which at that time was more than any other state, according to a report from the Government Finance Officers Association (GFOA).

On a per-filer basis, Tax Policy Center calculations show that in 2017, the year before the TCJA SALT cap took effect, taxpayers in the plaintiff states paid an average of —

  • $20,905 in Connecticut
  • $13,536 in Maryland
  • $19,162 in New Jersey
  • $23,804 in New York

Those are all substantial numbers, but this week's By the Numbers figure is 4 for the states who are still fighting the SALT cap.

Workarounds still in court: In addition to the SALT legal battle, a separate lawsuit challenging IRS rules that block certain state workarounds to the SALT deduction cap is still working its way through the legal system.

New York, New Jersey and Connecticut are the leaders of that action, filed this summer in federal district court in New York.

These three states are seeking validation of state tax options that allows residents to deduct their state and local income and property taxes in excess of the $10,000 limit. Basically, the states and/or more local jurisdictions let taxpayers make charitable contributions to special charitable programs and receive state property tax credits for those donations.

Benefits-of-Giving-to-Charity

Charitable gifts are not limited under TCJA, meaning the property tax amounts donated under these plans would be fully deductible on federal tax returns.

The New Jersey credit is for up to 90 percent of donations to local charitable funds. That would allow a Garden State taxpayer with a $20,000 property tax bill to donate that amount to the charitable fund, deduct $20,000 on his/her federal tax return as a charitable gift and get an $18,000 property tax credit from the state, bypassing the TCJA's SALT deduction limit by claiming another allowable tax break.

The Treasury Department essentially nixed such workarounds with a final ruling that went into effect Aug. 12 limiting state and local government tax credits to 15 percent of all charitable donations.

Personally, I don't think the states have much of a chance in either case, but stranger things have happened in courtrooms. So all y'all high property tax payers, of which, full disclosure, the hubby and I are even here in ostensibly low-tax, politically red Texas, definitely will stay tuned.

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