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I.R.S. Warns States Not to Circumvent State and Local Tax Cap

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Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#21

Post by gnicholas »

TLDR: the tax reform bill put a cap on deducting state and local taxes, which were previously fully deductible. Now you can only deduct $10k between property tax and state income taxes.

Residents of CA, NY, NJ, etc. easily hit these limits, so some of these states are giving residents other ways to effectively pay their state/local taxes while maintaining full deductibility for federal tax purposes.

Now the IRS is trying to fight back against these rules. But the IRS will have a difficult time drawing distinctions between the existing allowed deductions and the novel deductions they are trying to exclude.

As a (former) tax lawyer, I agree that this is an uphill battle for the IRS. If the states do a good job of creating alternatives to state income taxes, the IRS will have a very tough time defeating them in court.

It's interesting to see the Republican administration attempting to close these "loopholes" and heavily-Democrat states arguing in favor of said "loopholes". Quite a role-reversal!

Edit: clarified language in last paragraph

Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#22

Post by lr4444lr »

throwaway76543 wrote: post #18
JumpCrisscross wrote: post #7

Earlier quoted context omitted.

> If they consider their taxes a charitable contribution I should be able to decide to not pay it You still owe regular property taxes, with all the standard penalties for non-payments. What these laws do is give "municipal and county governments and school districts the legal authority to create special charitable accounts" and then let "local governments offer residents who contribute to the new accounts a nearly d…

This would be a quid pro quo contribution, already prohibited by the IRS. It's hard to see this "charitable conversion" nonsense as anything other than (potentially criminal) tax evasion. https://www.irs.gov/charities-non-profits/substantiating-cha...

It also threatens to disqualify a significant portion of income toward the filer's social security eligibility credits.

Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#23

Post by JumpCrisscross »

throwaway76543 wrote: post #18
JumpCrisscross wrote: post #7

Earlier quoted context omitted.

> If they consider their taxes a charitable contribution I should be able to decide to not pay it You still owe regular property taxes, with all the standard penalties for non-payments. What these laws do is give "municipal and county governments and school districts the legal authority to create special charitable accounts" and then let "local governments offer residents who contribute to the new accounts a nearly d…

This would be a quid pro quo contribution, already prohibited by the IRS. It's hard to see this "charitable conversion" nonsense as anything other than (potentially criminal) tax evasion. https://www.irs.gov/charities-non-profits/substantiating-cha...

That's an oversimplification. "A quid pro quo contribution is a payment made to a charity by a donor partly as a contribution and partly for goods or services provided to the donor by the charity" [1]. In this case, the charity isn't providing the quid pro quo, the local government is.

States are already allowed to let one deduct charitable contributions from state taxes however they like. And visiting a park one donates to isn't considered quid pro quo. These cases will be complicated and interesting.

[1] https://www.irs.gov/charities-non-profits/substantiating-cha...

Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#24

Post by virmundi »

mindslight wrote: post #11

Enough of a push for some states to grow a backbone, stand up for their citizens, and work towards expelling this ever-consuming totalitarian USG? Nah, probably not.

We are to pick this as a topic to fight back on? How about fighting back on law requiring people to purchase a product that they don’t want? No, USG says I have to have insurance while I don’t use doctors in network because they are worth less than WebMD. Instead I go to a doctor that I pay $160 out of pocket for a full hour visit that keeps notes on me that help to inform my future care.

Fighting what largess the USG wants to afford in deductions is silly. They could say there is 0 deduction for State taxes and be within their rights. NY is sulking because their government has gotten so out of hand that they have to strangle their citizens to avoid total default.

Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#25

Post by lr4444lr »

Spooky23 wrote: post #12
tango24 wrote: post #3

Earlier quoted context omitted.

Wait, property and state taxes are already deductible on federal 1040, right? So why are the states even doing this? The article is paywalled so surely I’m missing some info here.

The tax reform hit many places hard. You can only deduct the first $10,000. Every suburb of NYC has an average property tax of over $10k, plus most people pay state income tax. These people are doubly impacted by the higher standard deduction, which makes it difficult for all but the wealthy to deduct.

Not following your latter point: isn't the flat rate for the higher standard deduction progressive?

Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#26

Post by ajross »

larkeith wrote: post #8

"...The $10,000 cap was imposed as a way to offset some of the cost of other individual and business tax cuts. The Treasury Department and the I.R.S. are worried that the workarounds could further balloon the cost of the tax cuts, which are projected to add more than $1 trillion to the national debt over a decade." Describing this as likely to 'further balloon' the cost of tax cuts seems inaccurate and misleading - t…

No, from the perspective of the federal budget (c.f. Treasury and IRS, the entities "worried" here) it will absolutely decrease revenue and "further balloon the cost of the tax cuts". It's true that the loss would be to the states' tax revenue and not the taxpayers, but I don't see why that merits the kind of spin you're trying.

Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#27

Post by selectodude »

drak0n1c wrote: post #10
larkeith wrote: post #8

"...The $10,000 cap was imposed as a way to offset some of the cost of other individual and business tax cuts. The Treasury Department and the I.R.S. are worried that the workarounds could further balloon the cost of the tax cuts, which are projected to add more than $1 trillion to the national debt over a decade." Describing this as likely to 'further balloon' the cost of tax cuts seems inaccurate and misleading - t…

Additionally, the CBO recently recalculated the long-term cost of the tax cuts to be $440 billion due to the changes in economic growth after the tax cuts came into effect. The NYT article is ignoring the more recent $440b April estimate in favor of citing the trillion dollar December estimate. https://www.cbo.gov/publication/53651 https://www.investors.com/politics/editorials/trump-tax-cuts...

"For the 2018–2027 period, CBO now projects a cumulative deficit that is $1.6 trillion larger than the $10.1 trillion that the agency anticipated in June. Projected revenues are lower by $1.0 trillion, and projected outlays are higher by $0.5 trillion."

"Laws enacted since June 2017—above all, the three mentioned above—are estimated to make deficits $2.7 trillion larger than previously projected between 2018 and 2027, an effect that results from reducing revenues by $1.7 trillion (or 4 percent) and increasing outlays by $1.0 trillion (or 2 percent). The reduction in projected revenues stems primarily from the lower individual income tax rates that the tax act has put in place for much of the period. Projected outlays are higher mostly because the other two pieces of legislation will increase discretionary spending. Those revenue reductions and spending increases would result in larger deficits and thus in higher interest costs than CBO previously projected."

Thanks for the completely unsourced editorial from a really trash biased source, but it definitely requires that you don't read a single word from the CBO report.

Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#28

Post by bcheung »

Classifying local taxes as "charitable contributions"? I'm really on the fence about this.

On the one hand, it seems an absurd and grossly inaccurate characterization, borderline lying and definitely tax evasion.

On the other hand, there's this:

"The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

Also, someone needs to tell the IRS that they don't get to dictate Federal law. The legislative branch decides the laws, the judicial branch interprets them. The IRS is neither.

Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#29

Post by dahdum »

JumpCrisscross wrote: post #20
lotsofpulp wrote: post #13

Earlier quoted context omitted.

I would be surprised to see a judge take kindly to that type of nonsense.

> I would be surprised to see a judge take kindly to that type of nonsense We're a nation of laws. Not taking kindly to a case isn't justification for a ruling. The tax law was haphazardly drafted and written specifically to increase wealth transfers from surplus states ( e.g. Delaware, Minnesota and New Jersey) to deficit states ( e.g. New Mexico, Mississippi and West Virginia) [1]. I see valid arguments for both si…

The SALT deduction was a handout to the most affluent and a subsidy to the wealthiest states. It allowed them to increase their state and local taxes at the expense of federal revenue, spreading that burden across the country.

The tax plan certainly had flaws, but capping SALT was egalitarian IMO.

Re: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

#30

Post by ajross »

drak0n1c wrote: post #10
larkeith wrote: post #8

"...The $10,000 cap was imposed as a way to offset some of the cost of other individual and business tax cuts. The Treasury Department and the I.R.S. are worried that the workarounds could further balloon the cost of the tax cuts, which are projected to add more than $1 trillion to the national debt over a decade." Describing this as likely to 'further balloon' the cost of tax cuts seems inaccurate and misleading - t…

Additionally, the CBO recently recalculated the long-term cost of the tax cuts to be $440 billion due to the changes in economic growth after the tax cuts came into effect. The NYT article is ignoring the more recent $440b April estimate in favor of citing the trillion dollar December estimate. https://www.cbo.gov/publication/53651 https://www.investors.com/politics/editorials/trump-tax-cuts...

You're citing an IBD article (yeah, the one with "It's official!" in its title) which is inferring stuff from CBO, which doesn't claim that $440M at all in the link you posted. You get it by playing games with revenue and attributing every single dollar of the change to "the tax cut".

That's not economics. Tax policy never is, but this is especially bad work.

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