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THE NEW SALT DEDUCTION LIMITATION

January 10, 2018

By Ephraim Moss, Esq. & Joshua Ashman, CPA

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STATE DEMOCRAT LEADERS TAKE AIM AT REPUBLICAN TAX REFORM

In today’s political climate in the United States, it’s not very surprising that the Congressional voting on the recently-enacted tax reform bill ended up being cast very much along party lines. Not one Democrat, in fact, voted in favor of the bill, but due to the Republican majority in both chambers of Congress, the bill was passed and signed into law by President Trump.

While Congressional Democrats could not stop the tax reform’s forward momentum, state Democrat leaders are now taking aim to counteract the impact of the federal bill through state legislation and other means. In this blog, we look at some of the measures being proposed by Democrat leaders in New York and California, where the bill’s new limitation on the state and local tax (“SALT”) deduction will likely have a significant impact.

THE NEW SALT DEDUCTION LIMITATION

Under the newly-enacted Tax Cuts and Jobs Act (“TCJA”), starting with the 2018 tax year, state and local property and sales taxes are deductible only when paid (or accrued) in carrying out a trade or business, and state and local income taxes are not allowable as a deduction. However, an individual taxpayer can claim an itemized deduction of up to $10,000 for state and local property taxes not paid (or accrued) in carrying on a trade or business, and state local income taxes paid (or accrued) during the tax year. Foreign real property taxes are no longer deductible.

Political figures in high-tax states, such as New York and California, which have residents who may be significantly impacted by the new SALT deduction limitation, have begun to consider ways to curtail the new law’s adverse effects.

NEW YORK

Democrats in New York are considering a number of remedies. First, New York’s governor, Andrew Cuomo has tweeted that he plans to sue the federal government over the new SALT deduction limitation, arguing that it is an unconstitutional violation of states’ rights and a violation of the principle of equal protection.

The governor is also considering an entire restructuring of New York’s tax system, whereby the personal income tax, which is subject to the limitation, would be replaced with a tax on employers, which would remain deductible for federal tax purposes.

A so-called “hold harmless tax credit” has also been proposed in a New York Senate bill, which would very broadly provide a state income tax credit equal to any increase in a New York resident’s federal tax liability due to the new tax reform.

CALIFORNIA

In California, members of the Senate have introduced a new bill that would allow taxpayers to make a charitable donation to a new state fund and receive a credit for the payment on their California income tax return. The new credit would essentially be a “work around” of the SALT deduction limitation, because charitable contributions remain generally deductible for federal tax purposes.

THE FALLOUT FOR U.S. EXPATS

In truth, most U.S. expats will most likely not be affected by the SALT deduction limitation, because they are no longer domiciled in a U.S. state. However, some expats may potentially be affected – such as U.S. citizens who have recently moved abroad and are still considered temporarily domiciled in a state, or U.S. citizens living abroad who still have business concerns in the U.S.

In the bigger picture, since the Tax Cuts and Jobs Act is so new, it may take some time to fully understand its impact on taxpayers. Our blog page will continue to monitor events related to the TCJA and its impact on expats moving forward.

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