When Treasury could release SALT deduction rules

Register now

WASHINGTON -- Treasury and Internal Revenue Service rules on the permissibility of state workarounds for the $10,000 cap on the federal deduction of state and local taxes could be released as early as this month.

Details of the proposed rules haven’t been released.

The Office of Information and Regulatory Affairs at the Office of Management and Budget signaled on its website that it received the proposed rules on Aug. 2.

News of the filing was reported Monday by Tax Notes.

The Trump administration’s effort to publish a proposed rule comes just over two months after the IRS announced on May 23 that it was working on the regulations to enforce the $10,000 cap on what previously was an unlimited personal deduction for state and local taxes, also known as SALT.

Emily Brock, director of the federal liaison center of the Government Finance Officers Association, warned Monday that Treasury and the IRS should avoid “a hasty decision.”

“The proposed regulation has to systematically take into account the complexity of fifty different state tax systems as well as the [post-Tax Cuts and Jobs Act of 2017] national framework,” Brock said in an email. “Many of these states have already enacted workarounds. We would hope that Treasury/IRS benefits from a proper notice and comment process for this rulemaking in order for it to appropriately reflect the challenges of all affected stakeholders.”

Some states have enacted legislation to bypass the new cap and four states have recently filed a federal lawsuit challenging its constitutionality.

The lawsuit filed July 17 in the U.S. District Court for the Southern District of New York by Connecticut, Maryland, New York and New Jersey said the cap overturns more than 150 years of precedent dating back to the first federal income tax enacted in 1861.

“The SALT deduction is essential to prevent the federal tax power from interfering with the states’ sovereign authority to make their own choices about whether and how much to invest in their own residents, businesses, infrastructure, and more —authority that is guaranteed by the Tenth Amendment and foundational principles of federalism,” the lawsuit said.

Public release of the proposed rules could come as soon as Aug. 16 if Treasury has requested an expedited review pursuant to a memorandum on tax regulations the agencies signed in April.

The memorandum allows Treasury Secretary Steve Mnuchin to request an expedited review within 10 business days for rules implementing the Tax Cuts and Jobs Act.

“Treasury and OMB share a commitment to reducing regulatory burdens and providing timely guidance to taxpayers,” the April memorandum said.

Other regulatory reviews are to be completed within 45 days under the memorandum.

Under both cases, the deadline can be extended upon mutual agreement.

New York and New Jersey have enacted new state laws allowing residents and homeowners to make charitable donations to school districts, local governments and the state as a workaround of the new federal cap.

New York will allow not only the state and New York City to set up charitable trusts, but also all other cities, towns and villages as well as all 680 school districts.

The New York deduction allows 85% to 95% of the donations to be deductible on federal tax returns.

The IRS and federal courts have previously upheld the legality of smaller scale charitable deductions established by 33 states that can be deducted on federal taxes, according to a report issued several months ago by eight law professors.

Most of the earlier state tax credits cover only a fraction of the donation –- for instance, 25% or 50% -- but a few cover the full amount of the donation.

Among them are a 100% South Carolina tax credit for donations of up to $2 million to the Industry Partnership Fund at the South Carolina Research Authority and a 100% credit in Alabama for up to 50% of a taxpayer’s tax liability for donations to scholarship granting organizations.

For reprint and licensing requests for this article, click here.
Tax reform Income taxes State and local finance Government finance IRS Treasury Department Washington DC New York New Jersey Connecticut Maryland