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IRS Rules on SALT Charitable Workarounds Under OMB Review

POSTED ON Aug. 7, 2018

The federal government is wasting no time addressing state workarounds to the new cap on state and local tax deductions. 

On August 2 Treasury and the IRS delivered proposed rules on SALT workarounds involving charitable contributions to the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA), according to the OIRA’s website

The proposed rules, which have not yet been made public, are at OMB as a result of President Trump’s Executive Order 13789, issued in 2017. In addition to requiring the review and possible removal of all significant tax regulations issued after January 1, 2016, that executive order provided that future tax regulations undergo a review by both Treasury and the OMB.

Under an agreement reached by Treasury and the OMB in April, OIRA generally has 45 days to complete its review of tax regulations before they can be officially issued. Treasury can seek a 10-day expedited review of tax regulations developed to implement the Tax Cuts and Jobs Act — though the OIRA website indicated that the proposed SALT rules are not designated as economically significant.

The TCJA (P.L. 115-97) capped the individual SALT deduction at $10,000 per year, which leaders in a handful of high-tax states called a form of economic civil war; the state leaders believe the Republican-controlled federal government targeted primarily Democratic states with the cap to help pay for the TCJA. Four states in July filed suit against the IRS and federal government, challenging the cap as unconstitutional. 

The states vary in how they implement the SALT workaround involving charitable contributions. Generally, the mechanism allows individuals to make payments in lieu of taxes to a variety of government-operated foundations; individuals, in theory, can fully deduct those payments as charitable contributions for federal income tax purposes while simultaneously satisfying their state or local tax liabilities. A research paper by eight law school professors argues that the practice is common.  

But Treasury Secretary Steven Mnuchin earlier this year called this type of workaround ridiculous. Then in May, Treasury and the IRS announced in Notice 2018-54 that the proposed rules “will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers.” 

Treasury and the IRS also indicated that the federal government is monitoring other state legislative proposals to ensure that federal law controls the characterization of deductions for federal income tax filings.