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I Sue You, You Sue Me, They Sue Us, Here We Go Again[1]

07.22.19 | SALT Chat

The States of New Jersey, New York, Maryland, and Connecticut say they are challenging “. . . an IRS final rule that undermines state and local programs designed to promote charitable giving through the use of the state and local tax (SALT) credits.” The IRS says, “to be deductible as a charitable contribution under Section 170, a transfer to an entity. . . must be a contribution or gift. A contribution or gift for this purpose is a voluntary transfer of money or property without the receipt of adequate consideration, made with charitable intent.”

We have all watched the battle amongst the blue and red states over the $10,000 cap imposed on the deductibility of state and local taxes. Many states, including New York, New Jersey, and Connecticut have put workarounds in place allowing charitable contributions and corresponding tax credits. The IRS is of the view that these so-called workarounds are a quid pro quo, no different than having to limit the deduction to your favorite charitable organization’s annual dinner dance, by assigning a value to the meal and reducing the contribution accordingly.

The suing states claim in their lawsuit that the cap would “send a message to states with generous social welfare programs that their tax and spending policies would need to conform to those of the administration and the Republican Congress.” The IRS claims this is nothing more than business as usual and “that a payment of money generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return.”

Whatever side you come down on, tax experts are doubtful the states can win this lawsuit. One can argue whether a state should have high or low taxes and whether the federal government should subsidize the states in this fashion. I can tell you from first-hand experience, I have had many clients ask about leaving New York now that the state tax deduction is virtually worthless to them. I have even had a handful of those inquiries result in a move to a low or no tax jurisdiction. Many more are lining up just waiting for a major life event, such as a child’s graduation from school, to make the leap.

So, are the workarounds a quid pro quo or just an avenue to charitable giving? The battle of the states is on and we’ll see. If you have questions, contact me at wberkowitz@berdonllp.com or your Berdon Advisor.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.

[1] Music fans might be saying to themselves, the title sounds vaguely familiar. You are correct as I slightly modified a line from the song “Stiff Competition” which appeared on Cheap Trick’s 1978 album “Heaven Tonight.”