October 24, 2019 - Douglas Myser

States fail to overturn salt deduction. In our ongoing coverage of Tax Court issues, this case focuses on the SALT cap deduction limits.  It turns out that there is such a thing as too much SALT. U.S. District Judge J. Paul Oetken has dismissed a lawsuit filed by four states to strike down the cap on state and local tax (SALT) deduction under the Tax Cuts and Jobs Act. The lawsuit was filed in July of 2018 by four states in response to the cap on SALT deductions under the Tax Cuts and Jobs Ac:t. Under the Tax Cuts and Jobs Act, the amount that taxpayers may claim on Schedule A for all state and local sales, income, and property taxes together may not exceed $10,000 ($5,000 for married taxpayers filing separately). Previously, there were no limitations on the amount of taxes that taxpayers could claim on Schedule A, though some taxpayers faced reduced itemized deductions due to the alternative minimum tax and Pease limitations. The Tax Cuts and Jobs Act changed that, slapping a cap on SALT deductions beginning in the 2018 tax year. States fail to overturn salt deduction.

The four states, Connecticut, Maryland, New Jersey, and New York, were seeking "declaratory and injunctive relief" to eliminate the cap. What that means is that the states asked the court to declare that the cap was not enforceable, there was no separate request for money or other damages. New York Attorney General Barbara Underwood, said in a press release introducing the lawsuit, "This cap is unconstitutional--going will beyond settled limits on federal power to impose income tax, while deliberately targeting New York and similar states in an attempt to coerce us into changing our fiscal policies and the vital programs they support."

However, Judge Oetken found that the states did not prove that the IRS SALT cap was unconstitutional. He noted that "the states are correct that the SALT cap is in some ways unprecedented" since "the availability of an uncapped deduction for state income and property taxes has been a mainstay of the federal income tax since that tax's earliest inception. States fail to overturn salt deduction.

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