The IRS has announced that it intends to issue proposed regulations regarding the federal tax treatment of payments made by individuals to funds controlled by state and local governments in exchange for a credit against state and local taxes (SALT).
The Tax Cuts and Jobs Act ( P.L. 115-97) amended Code Sec. 164 to limit an individual’s deduction for the aggregate amount of state and local taxes paid during the calendar year to $10,000 ($5,000 in the case of a married individual filing a separate return). State and local tax payments in excess of those amounts are not deductible. This limitation applies to tax years beginning after December 31, 2017, and before January 1, 2026.
In response, some state legislatures have adopted or are considering legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay. Such legislation aims to allow individuals to characterize any transfers as charitable contributions deductible for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.
The proposed regulations to be issued by the IRS, however, will make clear that federal law governs the tax treatment of such transfers for federal income tax purposes, including substance-over-form principles. The regulations will help taxpayers understand the relationship of the federal charitable contribution deduction and the new limit on SALT deductions.