How to Deal with the SALT Limit


         One of the most talked about issues surrounding the Tax Cuts and Jobs Act (TCJA) was the deduction limitation of $10,000 when applying State and Local Taxes (SALT) to Federal taxes. One immediate idea that certain high tax states proposed, was to create charitable accounts where Taxpayers could give money to states to pay taxes, and yet have them considered as charitable contributions. In this way people could make up for the Tax deductions they lost. Some states loved the idea and started to put it into action, while the Internal Revenue Service (IRS) said it would not work. The rules have now been established.

          One of the rules being applied should be somewhat familiar. The whole idea behind a truly charitable donation is that a person is giving money or other goods in exchange for nothing. If there is an expectation of something in return, then it is really a payment and no charity is involved. From the perspective of the IRS, if a Taxpayer were to contribute in this way, that potential deduction would be reduced by the value of any tax credit received.

          Think of it this way. If a payment is made to satisfy a tax liability, even if it is a gift to a state created “charity”, the IRS will likely look at it as a tax payment. The rest will be a deduction, up to the $10,000 limit. This is a very simple way of looking at what is a nuanced and detailed issue. If this is a concern for you, take the time now to have a conversation with your Qualified Tax Professional.

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