In response to the Notice issued by the Internal Revenue Service (IRS) requiring taxpayers to adhere to federal tax law and its guiding concepts in deducting property tax payments on their federal income tax returns, the New Jersey Attorney General has threatened to take the matter to Court, if necessary, to preserve state and local property tax deductions.
The issue arises from the establishment by states of a charitable fund to accept property tax payments as a means to circumvent the $10,000 itemized deduction for all property, and state and local income taxes imposed by the Tax Cuts and Jobs Act. In addition to New Jersey, New York passed a similar law and the New Jersey Attorney General added that 33 states have 100 programs allowing people to receive tax credits for “donations” to governments and non-profits.
The issue that these newer programs are designed to address is the $10,000 limitation added by the new tax law. Simply put, taxes are limited to $10,000 and charitable contributions are not. By re-characterizing the taxes as charitable contributions, the legislators voting the programs into their state law intend to expand the deduction for taxpayers’ property taxes.
To settle the matter in Court, however, is a tall order. In a Grossman Yanak & Ford LLP posting last week, “IRS to Answer State Strategies to Avoid SALT Deduction Limits Imposed Under the TCJA”, the Service is likely to argue substance over form (in reality, contributions to the newly-created funds are simply disguised tax payments, per the Service, subject to the limitation).
A second argument the IRS is likely to present is that contributions qualifying for a federal charitable deduction are not permitted to benefit the donor. The fact that a credit results from the donation providing for a net reduction in the donor’s state and/or local tax obligation smacks of donor benefit from the actual contribution.
It is our belief that the Service would prevail in Court if the New Jersey Attorney General were to take the matter to Court.
When a tax code is as complicated as the one used in the United States has become over time, change is likely to affect a broad range of taxpayers. Often wholesale tax change hurts. Any reduction of a tax benefit previously allowed under the Code is going to hurt some particular group of taxpayers. In this instance, that group is homeowners who have long benefitted from preferential advantages afforded them over those taxpayers that have not owned homes. Forgetting the political bent to such a change as the tax deduction limitation, the question must be asked as to why home ownership should lead to lower overall income tax liabilities.