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Some states looking for ways around federal tax law

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Democrats in Maryland’s state legislature on Tuesday rolled out three bills in response to the new tax overhaul that President Trump signed last month, including trying to protect state and local tax (SALT) deductions. […]

One of the bills is designed to mitigate the fact that the new tax law caps the SALT deduction at $10,000. Under the measure, Maryland residents would be able to make charitable contributions to a state fund and receive a credit against their state taxes. The donations could still be deductible from federal taxes.

The other two bills would decouple Maryland’s tax code from the federal tax code.

One would allow Maryland residents to still claim personal exemptions on their state taxes, even though personal exemptions are eliminated from the federal tax code. Lawmakers said that residents would see state tax increases absent this change.

The other would separate the Maryland and federal estate taxes. The new federal tax law increases the amount that’s exempt from the estate tax to about $11 million for an individual, and Maryland Democrats want to limit the state’s exemption about to about $5 million.

* More…

The federal tax bill would ultimately cost Marylanders about $1 billion, Busch and Senate President Thomas V. Mike Miller Jr. estimated, with “$680 million in exemptions taken away.”

The bills would lower state taxes for about 92 percent of Marylanders, they said.

* Meanwhile, in New York…

Gov. Andrew Cuomo’s proposed conversion from an income tax to a payroll tax would be voluntary for some businesses, officials said Tuesday.

Cuomo, a Democrat, broke with expectation and did not include details of his planned changes to the state tax code when he unveiled a $168.2 billion spending plan. Instead, the governor said his tax commissioner will release a preliminary report on the potential change on Wednesday, as well as other proposals to help high-tax New York avoid the pinch of federal limits on the deductibility of state and local taxes.

That includes, as other states have proposed, setting up dedicated funds through which New Yorkers could donate to local governments and allowing businesses to substitute payroll taxes — which are fully deductible under the federal tax bill, H.R. 1 (115) — for income taxes, whose combined deductibility with property taxes is capped at $10,000. […]

The payroll tax switch has been described by business leaders as more complicated than the donation-credit ideas advancing in New Jersey and California, but its principal benefit is its application to a wider range of people — not simply those who elect to use it, as a donation would be.

* California…

The proposed California workaround, by Senate leader Kevin de Leon, is the first of what are expected to be several legislative efforts in high-tax states to mitigate the impact of the SALT deduction cap on their residents.

The average state and local tax deduction claimed by Californians is well above the cap, at $18,438, according to de Leon’s office.

To help ensure they can still deduct much or all of the state and local taxes they pay, de Leon has proposed letting residents make a charitable contribution to the state in exchange for a tax credit.

That way, the charitable contribution would be deductible on their federal return, since the new federal tax law doesn’t limit deductions for charitable gifts except in certain instances.

…Adding… HB4237…

Amends the Illinois Income Tax Act. Creates an income tax credit in an amount equal to the contributions made by the taxpayer to the Illinois Excellence Fund during the taxable year. Amends the State Finance Act. Creates the Illinois Excellence Fund. Provides that moneys in the Fund shall be used for exclusively public purposes, as specified under Section 170 of the Internal Revenue Code relating to charitable contributions and gifts. Amends the Counties Code. Provides that the county board may establish a fund in the county treasury for the purpose of accepting contributions for exclusively public purposes, as specified under Section 170 of the Internal Revenue Code relating to charitable contributions and gifts and may provide for a credit against the taxpayer’s property tax liability in an amount equal to the amount of the contribution. Effective immediately.

posted by Rich Miller
Wednesday, Jan 17, 18 @ 11:00 am

Comments

Interesting, hope these work. In Illinois we pay for more to the Feds than we get back. What are our brainiacs in Springfield planning?

Comment by Ron Wednesday, Jan 17, 18 @ 11:05 am
HB 4237 would create the Illinois Excellence Fund that folks would contribute $ to and get a state tax credit, similar to the California and Maryland proposals.

Comment by notsosure Wednesday, Jan 17, 18 @ 11:05 am
Living in CA, I think it’s a wonderful solution.

Comment by How Ironic Wednesday, Jan 17, 18 @ 11:24 am
= Living in CA, I think it’s a wonderful solution =

And as someone who will be moving to CA in a few months, I am also interested in seeing how that plays out. Ought to be some fun litigation!

Comment by Archiesmom Wednesday, Jan 17, 18 @ 11:27 am
We need to try. Red states have decided to punish blue states for the way they vote. Makes me wish the ACA had a stick for states that didn’t expand Medicaid. How naïve we were… Makes me question the billons for Houston relief. Let Texas pass an income tax. If states are going to treat each other as hostiles..

Comment by Anotheretiree Wednesday, Jan 17, 18 @ 11:31 am
Freeloaders. We need to pay our fair share in taxes. This is just another race to the bottom.

Comment by City Zen Wednesday, Jan 17, 18 @ 11:33 am
If we’re so big on being able to tax a tax deduction for taxes paid to other jurisdictions, why don’t we allow people to deduct federal income taxes on their state return? Of course doing so would hurt revenues when would be a regressive tax break benefiting the rich and the upper middle class, but so was the SALT deduction.

Comment by AndyIllini Wednesday, Jan 17, 18 @ 11:43 am
Being able to take* a tax deduction

hurt revenues and* would be

Sorry for the typos

Comment by AndyIllini Wednesday, Jan 17, 18 @ 11:45 am
Wondering how IDOR will handle the new Tax law in that the IL 1040 cites your number of Federal Exemptions which are going away ? May need to decouple in places ?

Comment by Anotheretiree Wednesday, Jan 17, 18 @ 11:46 am
The motive behind the workaround is noble, but it’s bad public policy. It does more to further the GOP demolition of government institutions than it does to ameliorate disagreements on tax policy. Creating this “charitable” system is a slippery slope vis-a-vis charter schools and their immolation of public school systems.

Comment by Anonymous Wednesday, Jan 17, 18 @ 11:54 am
Another retiree–the feds reduced the personal exemption to $0 but kept the definitions and qualification language in place. We’ll have to rewrite our return, but Illinois’ law cross-references the federal statute that is still in place, so we still get the exemption here.

Comment by notsosure Wednesday, Jan 17, 18 @ 11:57 am
So those paying over $10,000 in local/state taxes have more income and property wealth on average, and now state-level Democrats are trying to help those people reduce the amount of taxes paid to the federal government for government services that federal level Democrats want to provide. Interesting.

Comment by Shemp Wednesday, Jan 17, 18 @ 12:02 pm
Taxing the rich is good policy except when it is our rich.

Comment by CapnCrunch Wednesday, Jan 17, 18 @ 12:03 pm
Illinois Dem’s want to raise your taxes through the roof but they don’t want you to pay your actual tax bill? Anyone who thinks the IRS isn’t going to shut down this type of “work around” is fooling themselves.

Comment by Just Visiting Wednesday, Jan 17, 18 @ 12:05 pm
Typical ‘progressives’.

Comment by Blue dog dem Wednesday, Jan 17, 18 @ 12:17 pm
Little Maryland, one of the smallest states yet home of 6 of the 20 wealthiest counties in America, wants to workaround the tax code of their primary employer and economic engine. How quaint.

Comment by City Zen Wednesday, Jan 17, 18 @ 12:28 pm
I was told by Dems that taxing the rich was a good thing. What happened.

Comment by Biss' Brain Wednesday, Jan 17, 18 @ 12:29 pm
==Biss’Brain== I was told by the CON’s that debt was a bad thing. what happened?

Comment by Anotheretiree Wednesday, Jan 17, 18 @ 12:36 pm
Renaming taxes that are due as charitable donations to launder them clean for federal deductibility is offensive.

An out of control and over-extended government is not a charity by any stretch.

Progressives are exposing their panic and desperation with ideas like this.

Comment by anon on the road Wednesday, Jan 17, 18 @ 12:36 pm
Doesn’t taxing the rich reduce debt.

Comment by Biss' Brain Wednesday, Jan 17, 18 @ 12:40 pm
Good to see Apple just announced a repatriotization that will yield $38. billion in taxes and add 20,000 new jobs. Gotta give Trump kudos. Now if we can just work on that US steel industry a bit more…

Comment by blue dog dem Wednesday, Jan 17, 18 @ 12:48 pm
…just wondering. I wonder if HRC would have worked on this kinda tax deal….

Comment by blue dog dem Wednesday, Jan 17, 18 @ 12:51 pm
Taxing the rich is the “foundation” of the progressives -

The people that are over the limit I would estimate to have AGI of $200k to $250k.

I call that rich - the place where you live is your choice =

Comment by cannon649 Wednesday, Jan 17, 18 @ 1:15 pm
Ask any tax lawyer - if you take a charitable deduction to absolve a personal obligation( real estate taxes)- you are commuting tax evasion. Ever wonder why when you get a letter from a charity it states the donor did not receive a benefit. The people behind these scams are complicit in tax evasion and need to be prosecuted

Comment by Sue Wednesday, Jan 17, 18 @ 1:42 pm
Sue, I’m with you, I don’t see how this meets current IRS guidance on the definition of a charitable contribution. A tax credit has value, therefore you are receiving something of value, therefore it’s not deductible. Maybe there’s something I’m missing, but at first blush as a CPA it seems pretty clear cut. If you don’t get the tax credit maybe they could make it work. You wouldn’t be coming out money ahead, but would be supporting local governments which may be a good thing. I also agree with others that the SALT deduction was, generally speaking, regressive so these workarounds seem to me to be more about a certain constituency wanting a special tax break (granted one they used to get) than about fairness. To say certain states pay more or less to the federal government than they get misses the point. States don’t pay taxes, people do, and federal government spending isn’t directed just to those who pay, which is a good thing. So do we want a progressive tax code or not? If so, people in wealthier states pay more.

Comment by Anon Wednesday, Jan 17, 18 @ 2:34 pm
So if a wealthly family pays into a state fund that benefits Action for children or helps pays for Medicaid, how does that benefit that wealthy famiy?

Comment by Da Big Bad Wolf Wednesday, Jan 17, 18 @ 2:48 pm
Politics is just getting weird. I have Republican in DC cutting my my tax rate and Democrats in California providing an avenue for me to further lower my burden through a non-profit production set up.

#2018 #Lol@TheDeficit

Comment by California Guy Wednesday, Jan 17, 18 @ 2:51 pm
Da Big- that’s exactly why the wealthy tax payer gets the deduction- the benefit goes to someone else. The taxpayer gets the deduction and the donation benefits a beneficiary which cannot be related to the donor

Comment by Sue Wednesday, Jan 17, 18 @ 3:03 pm
If a wealthy family donates $10,000 to a government fund that pays for children’s health insurance, you’d probably be able to structure that so it’s deductible. But if they “donate” $10k to said fund, AND get a $10k tax credit, then I’d strongly question that it’s not a donation, based on my understanding of tax law. The tax credit is the thing of value.

Comment by Anon Wednesday, Jan 17, 18 @ 3:04 pm
Red states really need to contribute more the federal pot. They are primarily takers.

Comment by Ron Wednesday, Jan 17, 18 @ 3:09 pm
One risk with declaring taxes to be charitable contributions in order to avoid the SALT decution limits in the new tax bill is that the IRS currently bars contributions from which you benefit from being deducted. See IRS publication 526.

The easy workaround is to make the income tax an employer-side payroll tax, which would allow the employer to deduct it.

Yes, the wealthy need to pay more, but not just the wealthy in blue states…

Comment by chi Wednesday, Jan 17, 18 @ 3:10 pm
Chi- that’s what Cuomo proposed. Does anyone think employers are going to stand for a payroll tax. It’s idiocy from Blus State Democratic Governors all looking for headlines. Eliminating the full SALT deduction hurts extremely well off types. They cry about progressive taxes then holler when it hits them in the pocket.

Comment by Sue Wednesday, Jan 17, 18 @ 3:19 pm
==The easy workaround is to make the income tax an employer-side payroll tax==

It’s unclear how pre-tax retirement contributions would be treated under such a plan. Today, payroll taxes are calculated based on gross salary and your state income tax liability is based on your gross salary minus retirement contributions. If my employer starts paying an employer-side payroll tax, I would end up paying more in state income taxes at the expense of my retirement fund.

Comment by City Zen Wednesday, Jan 17, 18 @ 3:49 pm
Time for the wealthy to pay their fair share. The $10,000 SALT deduction applies to all 50 states. If your state decides to provide more (expensive) services than other states, you don’t get to deduct that from what you owe the Feds. Nor should it have ever been that way.

Comment by Robert the 1st Wednesday, Jan 17, 18 @ 3:50 pm
“Yes, the wealthy need to pay more, but not just the wealthy in blue states”

The law applies to all states. Politicians in blue states really don’t object to the feds raising taxes on their wealthy citizens. They’re upset because it becomes more difficult for them to raise taxes on those people.

Comment by CapnCrunch Wednesday, Jan 17, 18 @ 4:03 pm
The cap on the SALT deduction disproportionately impacts wealthy citizens in high tax states as compared to low tax states. Incidentally, those high tax states tend to pay more in taxes to the federal government than they receive in federal spending and the opposite tends to be true in low tax states. I think it is fair to say that these proposals would level the playing field.

Comment by SAP Wednesday, Jan 17, 18 @ 4:25 pm
I’m really tired of subsidizing poor conservative states with my federal taxes.

Comment by Anonymous Wednesday, Jan 17, 18 @ 5:24 pm
==I’m really tired of subsidizing poor conservative states with my federal taxes.==

Why stop there? No more subsidizing poor towns and their school districts with state taxes.

Comment by City Zen Wednesday, Jan 17, 18 @ 9:16 pm
Because I prepaid some property taxes in 2017, for the first time living in medium-tax Virginia I will get hit with the alternative minimum tax (AMT), albeit only modestly. However, the experience made me realize that many people with incomes above $200,000 who live in high tax states effectively had their SALT deductions limited under previous law, because the SALT deduction was not allowed under the AMT. I think that when the AMT and the rate reductions are taken into account, very few higher income folks, even in high tax states, will end up paying more under the new law. In a way, that is not so good, because it is going to cost the federal government a lot of money that it cannot afford to lose.

Comment by Andy S. Wednesday, Jan 17, 18 @ 9:44 pm
Like many others, I don’t understand how the “charitable contribution” in exchange for a tax credit will pass IRS / court scrutiny.

Like Blue Dog Dem, I have to give Trump credit for Apple (and it sounds like maybe several others are planning) bringing offshore funds back to the USA to provide jobs and investments. He should be more careful what he says; but he’s done an admirable job on a lot of fronts.

As one who has been hit by the AMT and could be hit pretty hard by the SALT change, I’m a bit nervous how it will all pan out; but I understand what they were trying to do.

Comment by logic not emotion Thursday, Jan 18, 18 @ 8:29 am
Want to help people out on property taxes… increase the percentage from 5% to 20% on the IL tax form for credit on property taxes paid. This would help make up for the increases property owners have had to endure over the years because of the State’s failure to pay their share of K-12 expenses. With the new more equitable school funding formula (once Rauner’s AV is worked out), the hope is that property taxes may start to decrease. However, when the ISBE with the new formula is still asking for double what they got last year,that may not happen. So, the State could give property owners a break by just increasing the percentage allowed on the State forms. 5% is only helpful to those who are in a much higher tax bracket.

Comment by Anon221 Thursday, Jan 18, 18 @ 9:11 am