You may have
read that the new tax law will limit your itemized tax deduction beginning this
year (2018).
This is of
no concern to you if you do not itemize deductions on your personal return.
If you do
itemize, then this might be a concern.
Here is the
calculation:
* state income taxes plus
* local income taxes plus
* real estate taxes plus
* personal property taxes
There is a
spiff in there if you live in a state without an income tax, but let’s skip
that for now.
You have a
sum. You next compare that sum to $10,000, and
… you take the smaller number. That is the maximum you can deduct.
Folks, if
you live in New Jersey odds are that real estate taxes on anything is going to be
at least $10 grand. That leaves you with no room to deduct New Jersey income taxes.
You have maxed.
Same for New
York, Connecticut, California and other high tax states.
Governor
Cuomo said the new tax law would “destroy” New York.
Stepping
around the abuse of the language, New York did put out an idea – two, in fact:
· Establish a charitable fund to which one could make payments in lieu of state income taxes. When preparing one’s individual tax return, one could treat contributions to that fund as state taxes paid. To make this plausible, New York would not make the ratio one-to-one. For example, if you paid $100 to the charitable fund, your state tax credit might be $90. Surely no one would then argue that you had magically converted your taxes into a charitable deduction. The only one on the short end is the IRS, but hey … New York.
· Have employers pay a new payroll tax on employee compensation, replacing employee withholding on that compensation. Of course, to get this to work the employee would probably have to reduce his/her pay, as the employer is not going to keep his/her salary the same and pay this new tax.
Other states
put out ideas, by the way. New York was not alone.
I somewhat
like the second idea. I do however see the issue with subsequent raises (a
smaller base means a smaller raise), possibly reduced social security benefits,
possible employer reluctance to hire, and the psychological punch of taking a cut in pay. Ouch.
The first
idea however has a sad ending.
You see,
many states for many years thought that there were good causes that they were
willing to subsidize.
· Indiana has the School Scholarship Credit. You donate to a scholarship-granting charity and Indiana gives you a tax credit equal to 50% of the donation on your personal return.
· South Carolina has something similar (the Exceptional SC), but the state tax credit is 100%.
New York and
its cohorts saw these and said “What is the difference between what Indiana or
South Carolina is doing and what we are proposing?”
Well, for one
thing money is actually going to a charitable cause, but let’s continue.
This past summer
the IRS pointed out the obvious: there was no charity under New York’s plan.,
The person making the “donation” was simultaneously receiving a tax benefit.
That is hardly the hallmark of a charitable contribution.
Wait, wait,
New York said. We are not giving him/her a dollar-for-dollar credit, so …..
Fine, said
the IRS. Here is what you do. Subtract the credit from the “donation.” We will
allow the difference as a deductible contribution.
In fact, continued the IRS, if the spread is
15% or less, we will spot you the full donation. You do not have to reduce the
deduction for the amount you get back. We can be lenient.
So what have
New York and cohorts done to Indiana, to South Carolina and other states with
similar programs?
You got it:
they have blown up their donation programs.
Way to go.
Why did the
IRS not pursue this issue before?
Well, before
it did not matter whether one considered the donation to be a tax or a
deductible contribution. Both were deductible as itemized deductions. There was
no vig for the IRS to chase.
This changed
when deductible taxes were limited to $10,000. Now there was vig.
There are
about 30 states with programs like Indiana and South Carolina, so do not be
surprised if this reaches back to you.
