The Treasury Department dealt the final blow to programs in states like New York and New Jersey designed to help residents circumvent the new $10,000 limit on deductions for state and local taxes.
The regulations, issued Tuesday, prohibit workarounds that would allow residents to create charitable funds for a variety of programs where donors can get a state tax credit in exchange, effectively removing the state and local tax, or SALT, limitation.
The 2017 Republican tax law capped at $10,000 the amount of state and local tax payments that filers could deduct from their federal returns. That change spurred states like New Jersey, New York and Connecticut to find a way to remove the economic pain of the cap, but the Treasury said that most plans gave people too many tax breaks.
Here’s how it worked: A state resident could, instead of paying state property taxes, choose instead to donate to a state-created charitable fund, for example, $30,000. That person would then get to write off the $30,000 as a charitable donation on his or her federal taxes and get a state tax credit for some of that, easing the sting of the lower write-off for their SALT levy.
The new federal regulations say taxpayers can receive a tax write-off equal to the difference between the state tax credits they get and their charitable donations. That means the taxpayer who makes a $30,000 charitable donation to pay property taxes and receives a $25,000 state tax credit would only be able to write off $5,000 on his or her federal tax