States loose court battle against SALT limit

The Tax Cuts and Jobs Act (TCJA) led to major changes to federal tax law. One example of the changes that impact taxpayers is the creation of a cap on the state and local tax (SALT) deduction taxpayers could claim on their federal tax returns. The limit, now set at $10,000, was a blow to wealthy tax payers in high tax states.

Deductions impact residents: A breakdown of the cost

Residents of high tax states often took advantage of the SALT deduction. Examples of average deductions for high tax states include:

  • Connecticut: $18,092
  • New Jersey: $19,563
  • New York: $21,779

As a result of the new law, these taxpayers could no longer deduct the full cost of their SALT payments. Instead, they can now only take, at most, a $10,000 deduction.

States fight back: attempts to thwart the limitation fail

Lawmakers of high tax states have taken action to thwart this provision. One example involved an attempt to implement a workaround. The workaround essentially allowed taxpayers to take the SALT deduction as a charitable donation. The IRS denied the workaround.

In another attempt to remove the limitation, Connecticut, Maryland, New Jersey and New York filed suit, stating the passage of this limitation exceeded Congress’ authority. The case was based on the argument the limitation was a “constitutional assault on the states’ sovereign choices.” The just dismissed the case, explaining the states had failed to show the SALT cap was an imposition on their sovereign rights as states.

The states may appeal the ruling and continue their fight to remove the SALT deduction limitation.

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