State and Local Tax Deductions Post Tax Reform

The IRS recently issued Notice 2018-54 which states that forthcoming regulations will address the deductibility of state and local tax payments for federal income tax purposes. Additionally, the notice states that federal law will control the characterization of the payments for federal income tax purposes regardless of state characterization. The impending legislation will outline the relationship between federal charitable contribution deductions and the new limitation on SALT deductions.

State Work-Around of Deduction Limit

The Tax Cuts and Jobs Act limits the amount of state and local tax an individual can deduct in a calendar year to $10,000. This limitation applies to taxable years beginning December 31, 2017 and ending January 1, 2026. In response, some states have adopted or are considering adopting legislation that allows individuals to make payments to specified entities in exchange for a tax credit against state and local taxes owed. The intent is to allow taxpayers to characterize the payments as fully deductible charitable contributions for federal income purposes.

Taxpayers should be aware that the IRS is continuing to monitor legislative proposals to ensure that federal law controls the characterization of deductions for federal income tax filings. Forthcoming regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.

Proceed with Caution

The notice does not indicate when the additional regulations will be released. In the meantime, the IRS suggests that taxpayers follow federal characterization of payments. While it may be tempting to follow the state regulation and thus save money – the IRS recommends taxpayers proceed with caution.

If you have questions regarding state and local tax deductions, please connect with us.

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