CA, You’re Not Alone – Treasury Bans All SALT Deduction Workarounds

The Treasury Department and the IRS recently issued final regulations blocking all states from trying to circumvent the tax reform’s $10,000 cap on state and local tax deductions.

In September 2018, CA Governor Jerry Brown vetoed the proposed bill to workaround the federal SALT cap, anticipating future federal regulations to ban these state circumvention strategies.

Brown was right.

On June 11, federal agencies finalized rules for other high-income states, such as New York, New Jersey and Connecticut, and blocked any state-devised programs aiding residents in receiving greater allowable federal deductions.

After the tax reform was passed in late 2017, many high-income states promptly passed legislation to permit municipalities to create charitable funds to support local initiatives, and in return, offer property tax credits to motivate residents to give to the charitable organizations. In tandem, residents could then write off the contribution as a federal charitable deduction, circumventing the $10,000 cap.

Unfortunately, the Treasury’s recent ruling now prohibits this tax treatment and constituted it “quid pro quo,” meaning the donor has received something of value in return for the contribution, whereas the deduction under Sec. 170 must be reduced or eliminated.

The new final regulations go into effect 60 days after the date they are scheduled to be published in the Federal Register. They were scheduled to be published on June 13, 2019. The legislation is also retroactive and applies to amounts paid or property transferred after August 27, 2018 when the proposed rules were published.

Contact your advisor at (805) 963-7811 if you have questions on how the new tax reform’s SALT cap affects your tax situation.