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IRS Issues Notice on State and Local Tax Deductions

This article is reproduced with permission from Spidell Publishing, Inc.

The IRS announced in Notice 2018-54 (Notice) that proposed regulations will be issued to address the deductibility of state and local tax payments for federal income tax purposes. The Notice also specifies that federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law.

The Notice is in response to the Tax Cuts and Jobs Act provision that limited the amount of state and local taxes an individual can deduct in a calendar year to $10,000, which prompted several states to consider legislation that would allow taxpayers to make payments to specified entities in exchange for a tax credit against state and local taxes. California is one of these states, and introduced SB 227 which would provide for a tax credit for contributions to a new fund called the California Excellence Fund.

Under the proposed regulations, SB 227 and the California Excellence Fund could be a nonstarter.

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