High-tax states won't be able to bypass SALT limit, Treasury says

Charitable funds no longer earn state tax credits

By Donna Borak, CNN
Chip Somodevilla/2014 Getty Images

U.S. Treasury Building

WASHINGTON, D.C. - Residents of high-tax states like New York and New Jersey will no longer be able to bypass a $10,000 limit on federal deductions for state and local taxes.

The Treasury Department on Tuesday finalized regulations that would bar individuals in high-tax states from creating charitable funds in exchange for state tax credits -- a maneuver developed as a workaround for changes to the treatment of state and local taxes under the 2017 tax reform.

The Republican-backed law capped the amount of state and local tax -- or SALT -- payments that individuals could deduct from their federal taxes at $10,000. As a result, states like New York, New Jersey and Connecticut tried to find ways to minimize the economic pain felt by residents from the cap.

"The regulation is based on a longstanding principle of tax law: When a taxpayer receives a valuable benefit in return for a donation to charity, the taxpayer can deduct only the net value of the donation as a charitable contribution," the Treasury Department said in a statement.

Democratic lawmakers have repeatedly issued dire warnings about the limit, saying the measure primarily hurts Democratic-leaning states that tend to have taxpayers with higher incomes and higher home prices.

The controversial limit was a key revenue raiser in the $1.5 trillion tax code overhaul, which slashed tax rates for corporations and individuals.

House Democrats have been working on a plan to increase the deduction, but any bill would likely be dead on arrival in the Senate.

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