NJ leaders blast IRS rules blocking SALT cap workaround
Unveiled by the U.S. Treasury and IRS last summer but finalized on Tuesday, the new rules limit how much taxpayers can deduct as charitable giving if they receive a state or local tax credit in return.
Gov. Phil Murphy and members of New Jersey’s congressional delegation are railing against new Internal Revenue Service rules that effectively block states from allowing taxpayers to make charitable contributions in lieu of property taxes as a workaround to the federal government’s $10,000 cap on state and local taxes deduction.
Unveiled by the U.S. Treasury and IRS last summer but finalized on Tuesday, the new rules limit how much taxpayers can deduct as charitable giving if they receive a state or local tax credit in return. It may sound benign, but Murphy and other state leaders blasted the changes, describing it as an intentional move by President Donald Trump and his administration to hurt New Jersey taxpayers who are already reeling from the 2017 tax law’s limit on the state and local taxes deduction.
“The IRS today made clear it is not interested in fairness for New Jersey’s taxpayers. Instead, it protects President Trump’s politicization of the federal tax code,” Murphy said in a statement. “Finalizing a rule that prohibits us from following decades of precedent to protect our residents’ tax deductions is a gut-punch to middle-class families who know that the Trump tax plan is a complete sham.”
The state and local taxes deduction, also known as SALT, has traditionally been popular in New Jersey due to the state’s notoriously high property taxes and steeply rising state income tax. It was capped at $10,000 as part of the Republican tax overhaul in order to reduce the overall loss of revenue from other tax cuts in the reform law, including a big corporate tax rate cut, reduced individual rates and a much higher standard deduction and child tax credit.
While most taxpayers nationwide were expected to pay less federal taxes under the reform law, New Jersey homeowners who pay high income and property taxes were expected to benefit the least, and some have faced higher taxes due to the cap on the SALT deduction.
In response, New Jersey created its own law last year to try to blunt the cap’s impact by authorizing towns, counties and other local governments to create charitable funds that homeowners can contribute to in return for property tax credits equal to 90 percent of what they gave.
The funds are intended to be used to pay for government services normally funded by property taxes, and homeowners who contribute are expected to be able to write off the full amount of those contributions on their federal tax returns because the new tax law kept in place an uncapped deduction for charitable contributions.
So far few if any local governments in New Jersey have followed through with creating the charitable funds and municipal leaders have cast the blame on the IRS regulations, which block residents from using charitable contributions as a federal write-off if they received a state or local tax credit in return.
The regulations don’t stop towns from creating charitable funds, but specify that the federal government would only permit taxpayers to deduct the amount they give minus whatever state or local tax credit they received.
The one exemption would be if the tax credit was less than 15 percent the value of the donation. In those cases, the full contribution would be considered deductible.
Murphy and state lawmakers argue that throws out years of precedent where the IRS previously recognized charitable donations to state or municipal funds that awarded tax credits in return.
“Not surprisingly, the Trump Administration is once again taking a swipe at New Jersey’s middle class taxpayers. The IRS has allowed these charitable funds for decades and is only now banning them because states like New Jersey sought to utilize them and establish its own,” U.S. Sen. Bob Menendez said Tuesday after the final regulations were released.
While litigation challenging the IRS regulations appears likely, Menendez and others said they would also continue to pursue repealing the SALT limit.
Earlier this year, Menendez and Rep. Bill Pascrell, D-9th of Paterson, unveiled legislation that would eliminate the $10,000 cap. In order to reduce the impact of the change, it also proposes a return to a top individual income tax rate of 39.6 percent, which was the rate before the tax overhaul reduced it to 37 percent and had it start on incomes of $500,000 for singles rather than $418,401.
Rep. Andy Kim, D-3rd of Bordentown Township, is a co-sponsor of the legislation and earlier this month testified before the House Ways and Means Committee to urge the panel to take up the legislation.
“New Jersey families have been overtaxed and underserved for too long. I urge the committee to consider legislation this year that would restore the deduction and immediately bring tax fairness back to the system,” Kim said during the hearing. “We have a chance now to work together to provide tax relief to millions of taxpayers in New Jersey and across the nation.”
Kim cited a survey of more than 500 New Jersey certified public accountants who reported 36 percent of their clients paid more in federal taxes for 2018, in large part because of the SALT cap, as well as other reports showing New Jersey taxpayers receive little back in federal services compared to the tax dollars they send to Washington.