While tax season is on its way, some states are already battling with the IRS over a lucrative tax deduction.
New York, New Jersey, Connecticut and Maryland sued the IRS in July 2018, arguing a newly enacted cap on the state and local tax (SALT) tax deduction was unconstitutional. A federal judge dismissed the case on Sept 30. In late November, the four states filed an appeal.
Tax deductions 101
Before the 2017 Tax Cuts and Jobs Act, most taxpayers could fully deduct their state and local taxes — which includes state property tax, local property tax, income tax and sales tax — from their taxable income, said Nathan Rigney, lead tax research analyst for H&R Block.
The tax law placed a $10,000 cap on these deductions.
Here are other deductions you can no longer claim.
Why is this cap a big deal?
The SALT deduction cap helped fund tax cuts and other tax benefits included in the tax law, Rigney said.
This cap hurts higher-income households, who pay higher state and local taxes. Households in states with higher income and property taxes were hit especially hard.
New York, Connecticut, New Jersey and Maryland have some of the highest state and local tax collections per capita, according to the Tax Foundation: No. 1, 2, 3 and 9, respectively.
In 2017, New Yorkers writing off state and local taxes took an average SALT deduction of $23,804, according to the Tax Policy Center.
The 2017 average state and local tax deductions in Connecticut, New Jersey and Maryland were $20,905, $19,162 and $13,563, respectively.
“Those states were the most affected, because their taxpayers were the least likely to benefit from the Tax Cuts and Jobs Act,” said Rigney.
The states argue their taxpayers now pay higher taxes to the IRS and that money is being redistributed in a way that disadvantages the states economically.
“New York is already the nation’s leader in sending more tax dollars to Washington than we get back every year,” New York Gov. Andrew Cuomo said in a statement. “We will not allow this administration to pick the pockets of hard-working New Yorkers to fund tax cuts for corporations and send even more money to red states.”
Will the cap be overturned?
Rigney doesn’t know. But, “people would probably be surprised if it did.”
An appeals ruling isn’t expected until next year. Until then, the states will continue to fight.
“My message to Mr. Trump and the IRS is simple: We look forward to seeing you in court,” Cuomo said.
Image: Kean Collection