On Monday, the IRS held a hearing as they consider proposed rules to prevent states from circumventing the cap on state and local deductions as a result of the new tax law. The 2017 tax law caps the state and local tax deductions on the Itemized Deduction Schedule A to $10,000. This includes state and local income taxes, real estate taxes and property taxes. The biggest effect of this change is on blue states with high taxes. I can’t quite figure out how this ever came to be in the first place. The lower tax state residents have been subsidizing the taxes of the East and West coast residents for years. Why has there never been an uproar about this until now?
In response to the new law, New York, New Jersey and Connecticut enacted legislature designed to “workaround” the cap by allowing residents to make donations to state and local “funds” which qualify for the charitable deductions which do not have the cap. In addition, the residents would receive a credit against their state and local taxes.
But under the IRS’s proposed rules, the taxpayer would only be able to claim the charitable donation deduction for donations that are greater than the amount of the tax credit. Therefore, zero effect to the taxpayer.
Private schools have long enjoyed the benefit of programs that offer tax credits for donations to private schools scholarship programs. School-choice and religious groups argued that the proposed rules overreach and should be reconsidered so that donors to school-choice programs don’t see their federal charitable tax deduction reduced. They insist the programs are charitable in nature and are not being used to circumvent the tax deduction cap. They want the law to only apply to contributions made for public purposes.
Scott Dinwiddie, an associate chief counsel at the IRS, said the agency has some tough decisions to make regarding this matter and will take the concerns of private schools and school-choice groups into consideration. He does not know when the rules will be finalized and how the final rules will treat scholarship tax-credit programs.
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