Eliminating the SALT Deduction
As many of you know, if you have been reading my blogs, the new tax reform law limits that deduction for State and local taxes, which include property tax deductions, to $10,000. Even worse with the doubling of the standard deduction to $12,000 for single taxpayers, and $24,000 for married taxpayers, few people will get any benefit from the state and local taxes since these plus other itemize deductions must exceed the standard deduction to be able to get any benefit.
Some high tax states such as New Jersey have tried an “end run” around this law by allowing “charitable contributions” made to the state in lieu of paying state and local taxes. Thus, if you would owe $13,000 in state income tax and $7,000 in property tax as an example, New Jersey and some other states will allow for a $20,000 “contribution” in lieu of your state income tax and property tax. This would ostensibly allow you count the whole $20,000 as a charitable contribution avoiding the $10,000 tax reform limit on state and local taxes. The problem is, “Does this work?” According to the IRS, the answer is no.
IRS has ruled that any contribution made to a state is reduced by any state tax liability waived because of the contribution. Thus, in the above example, if you made a $20,000 contribution to your state in lieu of the $20,000 of state and local taxes that you would owe, your charitable deduction, according to the IRS, would be ZERO!!
While this is simply a ruling by the IRS and not a court decision, in my opinion, IRS will probably win this in court. I think they are right. Thus, if I were you, I would assume that this tactic won’t work.
One of the benefits, however, of having a home based business is that at least you may qualify for the home office deduction, which would allow you a business deduction for a portion of the personal property tax on your home. This is a way around the $10,000 SALT limitation and would be deductible. Thus, if you are eligible for a home office, you can claim a portion of the property tax as a business deduction and also claim the rest of the state and local taxes, which would be deductible up to $10,000 as well.
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