SALT-Free Alchemy? Converting State Taxes to Charitable Deductions [New York]

When President Trump passed the Tax Cuts and Jobs Act, an individual’s deduction for state and local taxes (SALT) is now limited to $10,000 for a married couple or $5,000 for those filing separate returns. This limitation is for taxable years from after December 31, 2017 to before January 1, 2026.

Some states with high income rates and higher property taxes such as Connecticut, New Jersey, and New York have created government funds that allow charitable transfers to them count as credits towards property taxes. “These laws allow the state’s taxpayers to characterize those transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state and local tax liabilities.”

These programs may not last very long if the federal government has anything to do with it. The IRS is aware of the scheme and some members in Congress have already deemed them as a form of tax evasion. According to IRS Notice 2018-59: “Despite … state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.”

See Conrad Teitell, SALT-Free Alchemy? Converting State Taxes to Charitable Deductions, New York Law Journal, June 22, 2018.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.