The IRS is casting a skeptical eye on practitioners’ and states’ efforts to design workarounds to the new state and local tax deduction limits.
“The revenue law in this case seems to me is pretty clear,” Scott Dinwiddie, IRS associate chief counsel (income tax and accounting), told a session of the Federal Bar Association tax law conference in Washington March 8. “That’s not to say there might not be a plausible workaround, but some of what has been bandied about so far really seems fairly light.”
Scott Brian Clark, a partner at Dentons, said that for many property-owning taxpayers, the SALT deduction limit means “not that we’re paying more taxes . . . we’re paying substantially more taxes.” Clark estimated that at least 11 million taxpayers will be affected by the tax law’s $10,000 limit on the SALT deduction. New York metropolitan real estate prices are down 20 to 30 percent overall, and wealthy taxpayers are fleeing relatively higher-tax states for low-tax jurisdictions like Florida, he said.
Some states, including Clark’s own New York, explored prepayment options, but the IRS announced December 27, 2017, that the old deduction would be granted for prepayments only if the jurisdiction assessed the tax before December 31, 2017, Clark noted. Many localities in New York state don’t assess before the end of the year, so taxpayers lost their last chance at the deduction, he said.
New York has set up a charitable gift trust as one workaround, Clark noted. However, the IRS later issued a notice in May 2018, and followed by regulations, that indicated it would disallow those contributions as quid pro quos in expectation of getting a deduction in exchange for the contribution, Clark said.
Another approach uses either a passthrough tax on an entity or a payroll-type tax on employers, Clark said. The entity would pay the tax and pass along the net income to the taxpayer, he said. “So you get a benefit there in terms of reduced income, but you get an additional benefit in that the credit itself would flow up from the entity,” he said. “It sounds complex. It is complex.”
Clark noted that New York, Connecticut, Maryland, and New Jersey have sued over the SALT limit on constitutional grounds, although he added that the argument “is a little bit nebulous.” Congressional legislation to restore the deduction in whole or in part seems to be stuck, particularly in the Senate, he said. “Certainly it doesn’t seem like the current administration is anywhere near proposing an increase in the SALT deduction, or bringing back the form of the [old] law,” Clark said.
“There is a lot of energy here,” Dinwiddie said. “I expect we will be talking about both the issues and the controversies for many years to come.”