IRS Nay to Tax Deduction Caps Workaround

The 2018 Tax Cuts and Jobs Act placed a cap of $10,000 on an amount of the State And Local Taxes (SALT) which the filers can claim on their respective taxes. Three states- New York, Connecticut, and New Jersey, passed respective laws to make a workaround. The states made it possible for their municipalities to establish multiple charitable funds for paying local services. Property tax credits are brought in to incentivize the homeowners so that they make contributions. Accountants, however, sound a note of caution.

IRS unclear on the issue

It remains unclear whether the Internal Revenue Service (IRS) will give a green signal to these workarounds. Steve Mnuchin, the Treasury Secretary, has already expressed his disapproval. He said during a news briefing that he hopes the states are trying to cut budgets and providing tax cuts to the residents of the state and not trying to circumvent the law. For a taxpayer, there could be a number of potential problems.

Tax accountants are wary even as state legislators have consented to such an arrangement. They have signaled that they are willing to legally challenge federal government in the courts. Lawyers, especially proficient in tax procedures, have instructed their clients not to make any sort of contributions to charitable funds attached to the municipalities.

Problems

Critics of these workarounds say that the IRS needs proofs of charitable intent for any contribution to be deemed deductible. It is due to this reason that the decision of the municipalities to provide donors any credit for giving to a charitable fund can also be regarded as suspicious. Jared Walczak, the Tax Foundation's senior policy analyst, points out if the contribution imposes any liability on the recipient, then, in that case, the contribution is disallowed by the liability. The actual charity is canceled by the liability of state or local government providing a tax credit.

Attorneys now advise their clients who are still to decide whether they should make any contribution to the charitable fund of their municipality, to wait for some time. There remains a chance that a client could be subjected to the payment of back taxes. The contribution may not be viewed as a gift. If a client wants safety, they can go for the maximum $10,000 SALT deduction. The latter is made before making any charitable contributions to the state funds. It makes a wise decision to wait until the last moment in this case before making any decision.

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