Back to the Old Drawing Board

I’ve written before about certain states’ efforts to get around the new $10,000 cap on state and local taxes that can be deducted on federal tax returns. The IRS announced today they will be proposing regulations later this year on this issue. Here’s an excerpt:

In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay. The aim of these proposals is to allow taxpayers to characterize such transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

Despite these 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.

This is anything but promising for the efforts of California and New York. Words like “circumvent,” “despite,” and “mindful” pretty much tell us how this is going to turn out. If the IRS were going to allow this, the notice would not have such negative words. Instead, it’s all but a certainty that the doctrine of “Substance Over Form” will dictate that these so-called charitable donations are anything but charitable donations and, instead, will be treated as state tax payments on federal tax returns.

The California and New York legislatures would be far better off looking for things to cut in their states’ budgets. I know of a certain railroad in California that could save the state at least $77 billion….

Tags:

Leave a Reply