Treasury blocks states’ schemes to dodge limits in tax law

August 23, 2018

The Treasury Department on Thursday moved to block schemes a handful of states have passed to try to get around a new $10,000 cap on a state and local tax deduction that’s included in the GOP’s $1.5 trillion tax-cut law.

“Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families,” said Treasury Secretary Steven T. Mnuchin. “The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions.”

As a way to lessen the blow of the new cap, a handful of blue states have either set up or proposed public funds that taxpayers can pay into, then write off the donations as charitable contributions to lower their overall federal tax liability.

But in its proposed rule addressing the issue, the IRS said such a move constitutes a “quid pro quo” that could preclude a full deduction.

Mr. Mnuchin said he didn’t think the proposed rule would affect federal tax benefits for donations to state-run school voucher programs for nearly all taxpayers, which some Republicans had worried about.

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