On The Hill

Trump Administration Curbs Efforts on State, Local Tax Deductions

Since the enactment of the Tax Cuts and Jobs Act (TCJA) last December, Democratic states have begun to create tax loopholes to circumvent the $10,000 cap on state and local federal tax deductions.  States do this by interpreting these tax payments as charitable contributions.  As more states continue on this path, the Treasury Department announced new rules[i] that will uphold the cap by preventing states from creating these loopholes.  The new rule states a federal charitable deduction is allowed to the extent a contribution exceeds the amount of state tax credit generated by the contribution.  This would mean if a taxpayer makes a $10,000 contribution to charity and receives an 80 percent ($8,000) state tax credit, the taxpayer will only be able to claim a $2,000 federal deduction on their taxes.  If the state tax credit a taxpayer receives by making a charitable contribution is 15 percent or less, the taxpayer can deduct the full amount of their contribution from their federal taxes.  The rule focuses on state tax credits, not on the deductions on charitable contributions that taxpayers receive through their state.

Lawmakers have been fighting over this issue since the enactment of the TCJA.  Many Democrats believe their states are being targeted by congressional Republicans to pay for the cost of the TCJA.  They also worry the cap will affect their state budgets, which rely heavily on taxes paid for by high income constituents.  Republicans argue that the workaround is a gimmick and most taxpayers are receiving a tax cut from the TCJA, even with the $10,000 cap on state and local tax deductions.

Rep. Kevin Brady (R-TX), Chairman of the House Ways and Means Committee, released a statement [ii]on the proposed rules on Thursday.  He agreed with the Treasury’s move to “close the door on improper tax evasion schemes” and stated that Treasury was, “seeking to preserve important state tax credit programs that were designed to serve local charities”.

OMB Receives Global Intangible Low Tax Income Regulations

The Office of Management and Budget announced[iii] yesterday that it had received proposed Global Intangible Low Tax Income regulations, which signals the rules will likely be released soon.  The OMB’s Office of Information and Regulatory Affairs will review the proposal and finalize it over the next 45 days.  As the new regulations are finalized, multinational organizations anticipate it will be a new and complicated tax on their foreign earnings.

[i] https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-18377.pdf?utm_campaign=pi%20subscription%20mailing%20list&utm_source=federalregister.gov&utm_medium=email

[ii] https://waysandmeans.house.gov/brady-statement-on-state-schemes-to-circumvent-tax-cuts-and-jobs-act/

[iii] https://www.reginfo.gov/public/do/eoAdvancedSearch