Illinois’ Workaround of Federal Cap on State Deduction Shelved

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Michael J. Bologna

A plan for Illinois to circumvent the $10,000 federal deduction cap on state and local taxes is on ice after lawmakers declined to take action on the final day of the spring legislative session.

The House of Representatives left the state capitol May 31 without taking final action on H.B. 4237, described by sponsors as a “New Jersey model” workaround of the deduction limit in the 2017 federal tax act ( Pub. L. No. 115-97). The bill passed the House by a wide margin in April, but the chamber was required to take a second vote after the Senate approved an amended version May 24. House leadership placed H.B. 4237 on the concurrence calendar, but the bill was never called on the final day of the session.

Carol Portman, president of the Taxpayers’ Federation of Illinois, said lawmakers may return to the issue, but not until the Fall Veto Session.

“Some of it might resurface when they’re back in town in November, but that’s a long way away,” Portman told Bloomberg Tax in an email.

H.B. 4237 would have directed the state to create an income tax credit for dollars contributed to the new Illinois Education Excellence Fund during a taxable year. Funds contributed could have been used by the state for public purposes. Similarly, the bill would have allowed for a tax credit for dollars contributed in lieu of property taxes to any local government charitable funds.

The Senate amended these features to ease fears expressed by school districts over the proper distribution of any collected funds. The Senate amendment specified that the income tax credit would be equal to 90 percent of any contribution by the taxpayer, and required that dollars collected in the education fund must be transferred to the Common School Fund on an annual basis.

Portman said some House lawmakers were questioning the Senate strategy in the final days of the session and hoped to boost the credit to 100 percent of any contribution by a taxpayer. Ultimately, she said, the clock ran out and no final decisions were made.

The Internal Revenue Service recently warned taxpayers in workaround states such as New York, New Jersey, and Connecticut to proceed with caution when making donations to state-sponsored charitable funds. The service said it intends to propose regulations addressing the deductibility of such state and local tax payments, adding taxpayers should be aware “that federal law controls the proper characterization of payments for federal income tax purposes.”

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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