Coastal high tax states taxes have become an issue ever since the Presidential election a few years ago. The Trump administration has laid down rules aimed at preventing residents in coastal high tax states taxes from avoiding a new cap on widely popular and local tax deductions. The action over the new Republican tax law pits the government against high tax, heavily Democratic states in an election year showdown. The Treasury Department’s rules released target moves by states like New York, New Jersey, and California–where residents could see substantial increases in their federal tax bills next spring because of the $10,000 cap on state and local deductions. Experts say the issue likely will have to be resolved by the federal courts.
Four states-Connecticut, Maryland, New Jersey, and New York–already have sued the federal government over the deduction cap, asserting it’s aimed at hurting a group of Democratic states and tramples on their constitutional rights making authority. These coastal high tax states taxes are not only a court issue, but have also become an election issue as well.
A dozen states have taken, or are considering measures to get around the cap. Most of the workarounds take advantage of federal deductions for charitable contributions–which aren’t capped–in place of the old deductions for paying state and local income taxes. So people’s state and local taxes exceeding $10,000, which can’t be deducted are turned into deductible charitable contributions.
The new rules “dollar for dollar” limit also applies to many other states that already have charitable funds offering tax breaks, senior Treasury officials said. Those states include solidly Republican ones and others with relatively low taxes. In those programs, donors to schools, hospitals or land conservation programs can get their state taxes reduced in return–plus a charitable deduction on their federal tax returns. The limit means taxpayers only can deduct as a charitable contribution the portion of their donation for which they don’t also get a state tax credit.