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IRS to state tax work-arounds: No

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Illinois

The Internal Revenue Service is preparing to crack down on states that try to circumvent a new limit on the state and local tax deduction, saying on Wednesday that it will not allow local governments to find creative ways to help individuals fully deduct those taxes.

The I.R.S. warning comes in response to states, like New York, that have looked for ways to blunt the impact of a new $10,000 cap on the state and local tax deduction, known as SALT. The cap, which was included in last year’s $1.5 trillion Republican tax overhaul, hit predominantly Democratic, high-tax states hardest since it limits the amount of state and local sales, income and property taxes that residents can deduct from their federal taxes.

That has prompted a scramble among local lawmakers to find ways to allow constituents who owe more than $10,000 to continue to fully deduct those taxes and avoid a tax increase.

The I.R.S. said it would not tolerate states that try to flout the law — a stance that is likely to be challenged in court.

The IRS statement is here.

* Illinois News Network…

New York, New Jersey and Connecticut have passed laws to allow taxpayers to circumvent the federal cap, according to the Tax Foundation.

“In the notice, the IRS emphasized the ’substance over form’ doctrine, meaning that the IRS cares about the actual substance of a payment, and not the name or form it may be given,” the foundation wrote in an email. “While the actual guidance remains forthcoming, this is clearly bad news for the charitable contributions in lieu of taxes approach.”

The Illinois Senate has been crafting a work-around bill, and there’s also been some activity in the House.

posted by Rich Miller
Thursday, May 24, 18 @ 10:16 am

Comments

Lowering state and local taxes is one clever way to get around federal tax policy here.

Comment by Chris Widger Thursday, May 24, 18 @ 10:18 am
I mean, there’s not all that much they can do. The federal law is the federal law, and it includes loopholes. If states take advantage of them, the IRS doesn’t get to unilaterally decide “nah, pay us more”.

If they want to take it to court, sure. But I can’t see how they’d win. The law says what it says. “But that’s not the spirit of what we were intending” doesn’t constitute legal grounds.

Comment by PJ Thursday, May 24, 18 @ 10:21 am
Complete waste of time. How about lower taxes? Florida, Utah, Colorado and Texas are growing like crazy without them.

Comment by Ole General Thursday, May 24, 18 @ 10:22 am
Taxes really aren’t charity….

Comment by Steve Thursday, May 24, 18 @ 10:24 am
==How about lower taxes? ==

How about coming back to reality? Unless of course you aren’t in favor of paying our bills.

Comment by Demoralized Thursday, May 24, 18 @ 10:24 am
PJ obviously doesn’t know the tax code. No charitable deduction is allowed if the donor receives any personal benefit. How else would you look at a reduction in your personal tax liability as not being a personal benefit.

Comment by Sue Thursday, May 24, 18 @ 10:30 am
I’d like to emphasize to the IRS the “Letter of the Law over Intent” doctrine, meaning that the courts care about what the tax code actually says, not what you wish it achieved.

Comment by For Pete's Sake Thursday, May 24, 18 @ 10:32 am
PJ - the IRS has a lot of flexibility in interpreting the law. I’d imagine the argument would be, that something is not a charitable donation when you receive something of value for it, which is current law. A tax credit is something of value.

There might be precedents where some state tax credit was given for something that was still a charitable deduction, but I don’t know of one where the state was offering a 1 to 1 credit or close to 1 to 1 that was still a charitable deduction. It may well end up in court and I won’t issue any definitive statements about the outcome, but I think you’re off-base if you don’t think the IRS has a case.

Comment by andyillini Thursday, May 24, 18 @ 10:34 am
==Florida, Utah, Colorado and Texas are growing like crazy without them…==

You’ve named 4 states with per capita government expenditures much lower than the national average (note that Colorado, at $8,668 is actually pretty close to the average of $8,845, but that the next closest in this list is Texas at $7,522; for reference Illinois spends $8,930 per citizen, Cali spends $10,514, and New York spends a whopping $13,033 per citizen). Government-and taxes-grow with population, and population flows to low costs states will tend to drag up expenditures (read: taxes) over time.

Comment by DarkDante Thursday, May 24, 18 @ 10:41 am
==you’re off-base if you don’t think the IRS has a case==

A case, yeah. A good one, I think not. As the commentator above said: courts care about a pesky thing called “what the law actually says”.

Comment by PJ Thursday, May 24, 18 @ 10:41 am
==I mean, there’s not all that much they can do. The federal law is the federal law ==

And federal law is very clear that, when you receive value from the charity in return for your contribution, you can only deduct the excess of your contribution over the value you receive in return. That rule does not come into play when the state gives you a credit or deduction for contributions to your church, because it isn’t the church giving you anything in return. It does come into play when you are making a contribution to a state and the state gives you a tax credit equal to some fraction of your contribution in return. In that case, you can only deduct the excess of your contribution to the state over the value of the tax credit you receive from the state.

Comment by Whatever Thursday, May 24, 18 @ 10:49 am
PJ - and what others have said here is that the law actually says you only can claim a deduction for charitable giving for amounts above the value of any item received by the donor. Either way, good luck to those filers who decide to claim a charitable deduction in the hopes of eventually winning a suit against the IRS.

Comment by anon Thursday, May 24, 18 @ 10:49 am
Nearly all charitable deductions reduce your tax liability.

If reducing your tax liability was a “thing of value”, no charitable deduction would be tax-deductible.

The argument is as circular as a hamster wheel.

Comment by For Pete's Sake Thursday, May 24, 18 @ 10:50 am
I receive absolutely no benefit from Illinois public schools. I make very large donations to the state and city to fund schools. Definitely charity.

Comment by Ron Thursday, May 24, 18 @ 10:51 am
In the immortal words of Barack Obama, “Elections Matter”

Comment by Ole General Thursday, May 24, 18 @ 10:56 am
==Nearly all charitable deductions reduce your tax liability.==

But very few charitable contributions are made to the same entity that reduces your tax liability in exchange for the contribution.

Comment by Whatever Thursday, May 24, 18 @ 10:59 am
“I receive absolutely no benefit from Illinois public schools”

We all benefit from an educated populace. You need to broader understanding what benefits you.

Comment by Montrose Thursday, May 24, 18 @ 11:00 am
===I receive absolutely no benefit from Illinois public schools.===

You must not live in Illinois, as property values hinge on the excellence of the schools.

Even Chicago, where it can be argued that schoools can and do lack, the magnet schools are among the best in the country… ask Bruce and Diana Rauner, who clouted their denied Winnetka-living daughter into a CPS school because, I guess, New Trier “lacks” if you are looking for a public school to attend?

Comment by Oswego Willy Thursday, May 24, 18 @ 11:06 am
So it’s okay then for Trump and Republicans, with Rauner’s support, to raise taxes on people in certain states but slash them on multibillion-dollar corporations and super-wealthy estates? Why didn’t Trump and Republicans leave SALT deductions alone?

“Florida, Utah, Colorado and Texas are growing like crazy without them.”

So is California, whose budget surplus just grew by almost $3 billion and whose economy recently surpassed the UK’s. Then there are regional states with much higher marginal income tax rates.

Comment by Grandson of Man Thursday, May 24, 18 @ 11:11 am
And I receive a societal benefit when I give to the Greater Chicago Food Depository. 100% of that is a charitable donation. Why isn’t all the money I contribute in taxes to schools deductible?

Comment by Ron Thursday, May 24, 18 @ 11:13 am
==Why isn’t all the money I contribute in taxes to schools deductible?==

Are you really that daft to think that your taxes should be counted as “charity?”

Comment by Demoralized Thursday, May 24, 18 @ 11:16 am
The most bizarre is that giving to religious institutions is tax deductible. What a joke.

Comment by Ron Thursday, May 24, 18 @ 11:16 am
Demoralized, I don’t use the service. I am donating to run public schools.

Comment by Ron Thursday, May 24, 18 @ 11:17 am
This move by the IRS was totally predictable. It really doesn’t matter what state law says when it comes to federal taxes.

Comment by Demoralized Thursday, May 24, 18 @ 11:17 am
== I don’t use the service. I am donating to run public schools.==

Do you use all services provided by the government? Probably not. You’re argument is laughable.

Comment by Demoralized Thursday, May 24, 18 @ 11:18 am
==I receive absolutely no benefit from Illinois public schools.==

I can see the real estate listing for your house now:

“~~Walk~~ ~~Hike~~ Teleport to schools”
“Endless vistas of pre-teens freely roaming the streets at all hours”
“Home schooling included in price”

Comment by City Zen Thursday, May 24, 18 @ 11:19 am
I get a societal benefit by paying for the education of others but don’t use the service. I get a societal benefit for paying for other people’s food, but don’t use the service.

Comment by Ron Thursday, May 24, 18 @ 11:21 am
It should be noted: the same party that decries inheritance and capital gains taxes as double taxation, have declared that there will be a limit on the deduction of taxes we pay to state and local governments when filing our federal income tax.

That income is most definitely taxed twice. …and they are fine with it.
More than fine with it, they created it.

Comment by PDJT Thursday, May 24, 18 @ 11:21 am
“ask Bruce and Diana Rauner, who clouted their denied Winnetka-living daughter into a CPS school”

Bruce also clouted himself some Illinois TRS and Pennsylvania pension business. Bruce loves himself some government troughs. Bruce cain’t quit that unionized public employee money—like her’on.

Comment by Grandson of Man Thursday, May 24, 18 @ 11:21 am
==Do you use all services provided by the government?==

I thank my lucky stars every day I don’t use fire or EMT services.

Comment by City Zen Thursday, May 24, 18 @ 11:21 am
===I don’t use the service. I am donating to run public schools.===

Your Tone seems to be of someone not living in Illinois and understanding the symbiotic relationship between property values and the quality of schools.

Comment by Oswego Willy Thursday, May 24, 18 @ 11:22 am
Charity is something you give of your own accord. Tax is something you are required by law to pay, with the threat of prison and/or fines if you do not pay.
Can someone elect not to pay “Charity” to local schools, municipalities, or countys?

Comment by SOIL M Thursday, May 24, 18 @ 11:24 am
Ron-

If you are a strict libertarian and think that government should not collect taxes to pay for services but rather all services should be handled by the private market, fine. Just say that. At least there would be some consistency to your argument.

Comment by Montrose Thursday, May 24, 18 @ 11:26 am
Back to the issue at hand, there’s a big difference in the current IRS regulations & rulings between 1) the government unit receiving the contribution then turning around and giving a credit to the taxpayer and 2) a government unit giving a credit to a taxpayer for a contribution to a third-party nonprofit entity. And that’s the major form of school choice in certain “red” states, like Florida. The question I’d like to see answered is, will the IRS end school choice in Florida and states like it?

Comment by Anon Thursday, May 24, 18 @ 11:32 am
==I get a societal benefit by paying for the education of others but don’t use the service. I get a societal benefit for paying for other people’s food, but don’t use the service.==

Not true. You interact with people who were educated in Illinois every day in some manner. So you do make use of the Illinois educational system. Just as examples - your doctor, dentist, accountant, lawyer, the customer service rep for any place you call one, the person behind the counter at the store or restaurant, or waiting on your table, the mechanic, etc, etc, etc.
Also, if you weren’t educated in Illinois, you were educated somewhere, and someone paid taxes for that. You get to pay it forward.

Comment by thoughts matter Thursday, May 24, 18 @ 11:48 am
I remember from my Tax class that the IRS required a reasonable business decision when companies did something to reduce their taxes. Simply “Reducing our Tax liability” was not a valid reason, and would get you nailed by the Feds. And if anyone was dumb enough to put “Hey look guys, we’re totally reducing our tax liabilities,” the whole decision should be scrapped to avoid any perception of tax evasion.

I would imagine the states can’t turn around and do the same thing. Or at least create a massive loophole for everyone to jump through to reduce their tax liability.

Comment by ChrisB Thursday, May 24, 18 @ 12:03 pm
*put in writing

Comment by ChrisB Thursday, May 24, 18 @ 12:04 pm
Cool. Should definitely boost Peter Roskam’s chances of re-election. Good for IL House and Senate GOP candidates in the burbs, too. #MAGA, baby

Comment by Moe Berg Thursday, May 24, 18 @ 12:05 pm
OW, what? The highest priced homes are almost all in Chicago. CPS, does have good schools but they aren’t the reason home prices are high.

Comment by Ron Thursday, May 24, 18 @ 12:13 pm
Montrose, I am definitely a social libertarian. I am also generally liberal with government spending. It just shouldn’t be in order to maintain a kleptocracy like illinois.

Comment by Ron Thursday, May 24, 18 @ 12:14 pm
===The highest priced homes are almost all in Chicago.===

Chicago is the 3rd largest city in America, in the 3rd largest media market. People live in Chicago for numerous reasons, people buy property in Chicago for numberous reasons too.

Property values downstate, central, western and southern Illinois may hinge on farming, rail, population centers, even higher education.

Cook and the Collars… schools. Property values hinge a great deal on schools.

Schools and property values everywhere… are baked into the overall equation, but a significant variable no matter the location.

Property taxes make that symbiotic relationship.

Ignoring that is not being honest to the discussion.

Comment by Oswego Willy Thursday, May 24, 18 @ 12:20 pm
=== The cap, which was included in last year’s $1.5 trillion Republican tax overhaul, hit predominantly Democratic, high-tax states hardest since it limits the amount of state and local sales, income and property taxes that residents can deduct from their federal taxes.===

I’d just like to thank Peter Roskam and his GOP pals in the Illinois delegation for really sticking it to all of us with this dumb tax cut. Roskam was one of the architects of this debacle, and I fear he isn’t getting the credit he so richly deserves.

Comment by 47th Ward Thursday, May 24, 18 @ 1:03 pm
This is another nail on charitable deductions if you can’t get to the 24,000 threshold and need to pay the state taxes there isn’t much left for charities.

Comment by Wow said I Thursday, May 24, 18 @ 1:45 pm
The best plan is to vote out everyone who voted yes on this tax bill and restore the state income tax and property tax deduction. November is only 6 months away.

Comment by Da Big Bad Wolf Thursday, May 24, 18 @ 2:30 pm
We are stuck with this until 2021 at the earliest.

This is a massive blow to those who hoped for a progressive income tax in Illinois, as high earners will already notice a massive tax increase on next years tax bill because of how the state and local deduction has been curtailed.

Good luck trying to increase any state, local or property taxes on top of that tax increase. People will revolt.

The timing couldn’t be worse for those who had hoped to implement the progressive tax soon.

Well off folks are going to feel like they got hit with a big tax increase already, but sadly that will do nothing for Illinois.

Comment by Anon Thursday, May 24, 18 @ 2:54 pm
$10,000 deduction is too much. It should be reduced to zero.

Every jurisdiction that has the authority to tax anyone should be required to send a bill. In other words, every school district, park district, township and the many other nonsensical taxing authorities should send an itemized bill.

Each taxing body should have an “explanation of benefits” along with it, with a breakdown of where their money was spent.

Comment by Jack in the Box Thursday, May 24, 18 @ 5:27 pm
==should send an itemized bill==

You already get that. You might want to pay attention to your tax bill next time.

==with a breakdown of where their money was spent==

You can get that too and in most cases on a website. And if not you can ask them.

Comment by Demoralized Thursday, May 24, 18 @ 11:42 pm
I don’t understand the opposition to the $10K limit, especially from the same people who champion a progressive income tax - this limit is effectively a “progressive” tax - if someone makes $100K in income, IL state tax would be less than $5K. Add in $5K in property taxes (which isn’t too far off the tax bill for a median-priced home in IL), and you’re at the $10K limit. So, you’re only penalized if you make $100K per year with a median-priced home? Congratulations, you’re officially “wealthy”, at least in my book - so pay up, and enjoy your progressive tax bill.

Comment by Stuntman Bob's Brother Friday, May 25, 18 @ 6:57 am
The median family income in Chicago metro is like $85k. $100k is nowhere near “wealthy”.

Comment by Anonymous Friday, May 25, 18 @ 8:10 am
==The median family income in Chicago metro is like $85k. $100k is nowhere near “wealthy”==

The way I understand it, the $10K limit is for individuals, not families. And, we’re talking about the entire state, not just the Chicago Metro, so you’re cherry-picking data - isn’t the state average annual salary about $55K? Again, if an individual has more than $10K per year in SALT, they are definitely living above the median - $100K doesn’t make you “rich”, but it does make you “wealthy”. The SALT deduction limit IS a progressive tax, because it goes after earners well above the median, and affects a person with proportionality to their greater income.

Comment by Stuntman Bob's Brother Friday, May 25, 18 @ 11:26 am