New Jersey to Fight ‘Misguided’ IRS Guidance on Tax Act End-Runs

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By Leslie A. Pappas

New Jersey is ready to challenge the Internal Revenue Service (IRS) over its new state law that gives property tax credits to residents who make charitable contributions to local governments.

The IRS should drop its “misguided” guidance that could end deductibility of such contributions, New Jersey Attorney General Gurbir S. Grewal said in a letter to the IRS Commissioner David J. Kautter May 24.

“I urge you, in the strongest terms, not to upend 100 existing state charitable programs in 33 states,” Grewal said in response to IRS Notice 2018-54, released May 23. The notice marked the first time the IRS has weighed in on the matter since the 2017 federal tax act ( Pub. L. No. 115-97) set off a surge of state-side activity to lessen its perceived impact on certain states.

“The IRS should not play politics; instead, it must confirm its longstanding interpretation of federal law,” the letter says. “Should the IRS and Treasury Department continue down this path, New Jersey will have no choice but to challenge the new rule in court.”

The U.S. Department of the Treasury and the IRS said in the May 23 notice that the agency will issue proposed regulations on the deductibility of state and local tax payments for federal income tax purposes. Notice 2018-54 also informs taxpayers that federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law.

The 2017 federal tax act ( Pub. L. No. 115-97) imposed, among other things, a $10,000 cap on the state and local tax (SALT) deduction.

New Jersey has led a charge among mostly Democratic-leaning states to avoid the new cap. This month Gov. Phil Murphy (D) enacted legislation allowing local governments to set up charitable organizations that can accept property tax payments. In turn, homeowners can declare those “donations” as gifts to offset federal taxable income. New York Governor Andrew Cuomo signed similar legislation last month.

The IRS warned taxpayers to proceed with caution on these workarounds, which remain pending in states such as Illinois and California.

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at lpappas@bloomberglaw.com

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

For More Information

The letter is at http://src.bna.com/y5z

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