Governor Andrew Cuomo’s plan to subvert the new cap on the federal state and local tax deduction—a workaround first tried in Suffolk County—has been shot down by the Internal Revenue Service.
But state and county officials have vowed to continue the fight.
Formerly, there was no cap on how much taxpayers could deduct from their federal tax returns for the state and local taxes they paid on their property and income. But President Donald Trump’s tax law, the Tax Cuts and Jobs Act of 2017, imposed a $10,000 cap on the state and local tax deduction, known as SALT.
In an area such as Long Island, where property tax on a single-family home can easily surpass $10,000, the tax law led to a federal tax increase rather than a cut for some taxpayers.
Suffolk County was the first county to attempt to take advantage of a New York State law that was created in response to the SALT cap. The law would allow municipalities to set up charitable gift reserve funds allowing taxpayers to avoid the cap: Taxpayers could choose to give to these funds, supporting certain state expenses, to reduce their tax bills. Since their contributions would be considered charitable gifts rather than tax payments, the money would not be subject to the new cap—in theory.
The IRS issued final regulations in June that prevent taxpayers from claiming a charitable gift deduction on their federal tax returns if their contributions reduced their state or local tax bills.
Now, New York, New Jersey and Connecticut—three states with high property taxes—are suing the IRS to throw out the regulations. The states are arguing that the rule is arbitrary, outside the agency’s statutory authority, and a violation of the federal Administrative Procedures Act.
“The final IRS rule flies in the face of a century of federal tax law that says state choices to provide tax incentives for charitable donations do not affect the federal deductibility of those gifts,” Gov. Cuomo said in a statement regarding the litigation. “It will—for the first time, and solely in the name of retribution—require taxpayers to subtract the value of state or local tax credits from their federal charitable deduction.”
The governor called the move “entirely unacceptable” and said the IRS was being used as a political weapon.
In explaining the agency’s decision, the text of the IRS’s new rule states that the IRS set out a two-part test to determine whether taxpayers should be entitled to a charitable contribution deduction. The first part questions whether the payment to the charity exceeds the market value of the privileges or other benefits the taxpayer receives, and, second, whether the excess was paid with the intention of making a gift. The agency stated that the final regulations apply longstanding principles regarding charitable intent and quid pro quo.
New York officials did not see it that way.
“The IRS’s move to end tax benefits for charitable giving is yet another attempt by the Trump administration to unfairly target the hardworking taxpayers of states like New York,” New York State Attorney General Letitia James said in a statement. “We will not stand idly by as this administration throws out decades of historic precedent putting our local economies, education systems and other critical public programs at risk. My office stands firm against this unlawful attack and will do everything in our power to ensure that state taxpayers are protected.”
According to the attorney general’s office, 33 states had charitable contribution programs for causes such as natural resource preservation and providing aid for higher education and domestic violence shelters. But the IRS then changed its rules when New York, New Jersey and Connecticut decided to establish such programs. The change “flies in the face of prior IRS policy statements and tax court rulings on the issue,” the office stated.
Earlier this year, Suffolk County Executive Steve Bellone announced his SALT CAP Response Plan to restore SALT deductions for taxpayers. In addition to the charitable gift reserve fund, the plan includes working to restore the full SALT deduction on the federal level, reducing mortgage fees and expanding affordable housing opportunities.
“Washington is doubling down on its efforts to raise taxes on Long Island homeowners,” Mr. Bellone said in a statement on July 17. “Suffolk County will not roll over and lie down—we will fight the federal government tooth and nail. We’re proud to join with a coalition of counties, local governments, and school districts across the state to challenge these unlawful, arbitrary and capricious regulations.”
Staff Writer on Jul 19, 2019