4 States Sue IRS and Treasury Over $10,000 Local Tax Deduction Limit

The legal action initiated on July 17 by Connecticut, Maryland, New Jersey and New York – states with among the highest income tax rates in the country – names Treasury Secretary Steven Mnuchin, Acting IRS Commissioner David Kautter, the U.S. Treasury, the Internal Revenue Service and the U.S. (including all government agencies and departments responsible for the passing and implementing the TCJA) as defendants. It asks to void the new limit on SALT deductions through declaratory and injunctive relief.

Under prior law, taxpayers who itemized deductions on Schedule A generally were able to deduct the full amount of their state and local property taxes, plus either their state income and local income taxes or state and local sales taxes. The alternative sales tax deduction was based on an IRS-approved table (plus add-ons for certain expensive items) or actual receipts.

Typically, residents of states with high income taxes, like those challenging the new SALT provision, opted to deduct state and local income taxes in addition to property taxes. This often turned into their biggest deduction on Schedule A. It’s not unusual for taxpayers in certain parts of the country to pay tens of thousands of dollars each in state and local property taxes and income taxes.

But the TCJA limits the annual deduction for any allowable combination of SALT payments to only $10,000. This change takes effect in 2018 and is scheduled to last through 2025.

In the lawsuit complaint, the four states argue that limiting the deduction conflicts with an essential part of the constitution dating back to 1861 and reflecting the Sixteenth Amendment adopted in 1913, carving out state rights in the federal scheme. Thus, they contend that the TCJA provision for SALT payments is unconstitutional.

The states also maintain that the dollar cap resulted from a “rushed and highly partisan” process. Notably, they say that the limit is unfair and causes disproportionate injury to their residents of “blue states.” For instance, it is estimated that taxpayers in New York will owe an extra $14.3 billion in federal tax in 2018 alone. By way of comparison to the $10,000 cap, the average SALT deduction claimed by New York taxpayers in 2015 was almost $22,000.

In addition, the lawsuit alleges that the SALT cap will artificially depress home values in the four states. To compound the damage, the change will have a negative impact on taxpayers who purchased their homes years ago and have come to rely on SALT deductions, only to have the rug pulled from under them without “fair warning.”

Finally, the lawsuit claims that the SALT provision impedes the ability of the states to pay for essential services such as schools, hospitals, police and road and bridge construction and maintenance.

What will the outcome be? Experts are divided, but most agree it will take a lengthy time for the case to progress through the courts. In the meantime, a reconstituted Congress could have a say in the matter.


Referenced- Avalara article dated 7/30/2018

#IRS offers #guidance on recent #529_education_savings_plan #changes

WASHINGTON — The Internal Revenue Service and Department of the Treasury today announced their intent to issue regulations on three recent tax law changes affecting popular 529 education savings plans.

Notice 2018-58, addresses a change included in the 2015 Protecting Americans From Tax Hikes (PATH) Act, and two changes included in the 2017 Tax Cuts and Jobs Act (TCJA). Taxpayers, beneficiaries, and administrators of 529 and Achieving a Better Life Experience (ABLE) programs can rely on the rules described in this notice until the Treasury Department and IRS issue regulations clarifying these three changes.

Tuition refunds

The PATH Act change added a special rule for a beneficiary of a 529 plan, usually a student, who receives a refund of tuition or other qualified education expenses. This can occur when a student drops a class mid-semester. If the beneficiary recontributes the refund to any of his or her 529 plans within 60 days, the refund is tax-free.

The Treasury Department and the IRS intend to issue future regulations simplifying the tax treatment of these transactions. Re-contributions would not count against the plan’s contribution limit.

K-12 education 

One of the TCJA changes allows distributions from 529 plans to be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary (k-12) public, private or religious school of the beneficiary’s choosing.

Rollovers to an ABLE account

The second TCJA change allows funds to be rolled over from a designated beneficiary’s 529 plan to an ABLE account for the same beneficiary or a family member. ABLE accounts are tax-favored accounts for certain people who become disabled before age 26, designed to enable these people and their families to save and pay for disability-related expenses.

The regulations would provide that rollovers from 529 plans, together with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) cannot exceed the annual ABLE contribution limit — $15,000 for 2018. For more information about other TCJA provisions, visit IRS.gov/taxreform.

Back to Top

Blog at WordPress.com.

Up ↑