US aims to stop citizens in high-tax states from circumventing SALT cap US aims to stop citizens in high-tax states from circumventing SALT cap

US aims to stop citizens in high-tax states from circumventing SALT cap
04 Sep 2018

The US Government has moved to block high-tax states from helping taxpayers circumvent the new cap on federal deductions for state and local tax payments.

The Republican tax law enacted in December placed a US$10,000 cap on the deductions taxpayers can claim on their federal tax return for state and local tax payments, including property and income taxes, known as SALT.

The highest state and local tax rates tend to be in Democratic-leaning areas, Reuters said, and critics of the capped SALT deduction claim it was intended to disproportionately impact taxpayers in those states. 

After the law’s enactment, some high-tax states set up funds for public services to which taxpayers could make donations, receive credits against state and local taxes that they owe and claim the payments as charitable deductions on their federal returns.

But the new rule proposed by the US Treasury Department and Internal Revenue Service would apply existing tax law related to charitable donations, which allows taxpayers to deduct only the portion from which they derived no personal benefit, such as a state or local tax credit.

Treasury Secretary Steven Mnuchin said in a statement: “Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families. The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions. 

The tax legislation slashed the top corporate tax rate to 21% from 35% and temporarily cut individual rates. It roughly doubled the standard deduction but limited or eliminated other popular deductions, such as SALT.

Democrats criticised the law as a giveaway to corporations and the wealthy which, even according to government estimates is expected to add US$1.9 trillion to the national debt burden over the next 10 years.

Emma Woollacott

Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.

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The US Government has moved to block high-tax states from helping taxpayers circumvent the new cap on federal deductions for state and local tax payments.

The Republican tax law enacted in December placed a US$10,000 cap on the deductions taxpayers can claim on their federal tax return for state and local tax payments, including property and income taxes, known as SALT.

The highest state and local tax rates tend to be in Democratic-leaning areas, Reuters said, and critics of the capped SALT deduction claim it was intended to disproportionately impact taxpayers in those states. 

After the law’s enactment, some high-tax states set up funds for public services to which taxpayers could make donations, receive credits against state and local taxes that they owe and claim the payments as charitable deductions on their federal returns.

But the new rule proposed by the US Treasury Department and Internal Revenue Service would apply existing tax law related to charitable donations, which allows taxpayers to deduct only the portion from which they derived no personal benefit, such as a state or local tax credit.

Treasury Secretary Steven Mnuchin said in a statement: “Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families. The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions. 

The tax legislation slashed the top corporate tax rate to 21% from 35% and temporarily cut individual rates. It roughly doubled the standard deduction but limited or eliminated other popular deductions, such as SALT.

Democrats criticised the law as a giveaway to corporations and the wealthy which, even according to government estimates is expected to add US$1.9 trillion to the national debt burden over the next 10 years.

Emma Woollacott

Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.

OTHER ARTICLES THAT MAY INTEREST YOU

US approves President Trump's controversial $1.5tr tax bill

China to raise income tax threshold

Indian citizens asked for views on improving national tax system

 

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