Treasury deals final blow to states' SALT deduction workarounds

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

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