States Sue IRS, Treasury To Strike Down SALT Cap Under New Tax Law

[Abby Normal]

The complaint argues that those who drafted the Sixteenth Amendment understood that "the SALT deduction is essential to prevent the federal tax power from interfering with the States’ sovereign authority —authority that is guaranteed by the Tenth Amendment and foundational principles of federalism."

https://www.forbes.com/sites/kellyphillipserb/2018/07/17/states-sue-irs-treasury-to-strike-down-salt-cap-under-new-tax-law/#4bedf2915303

[Jack from Ohio]

How is this a State issue?  The law affects Federal income tax, and not the amounts of State income tax?

Sounds like there are some well funded lobbyists affecting the actions of State legislatures.

I hope the judge throws it out, for the reasons I just stated. 

[Catherine]

I go with Jack on this one.  The 16th amendment authorized the federal government to "collect taxes on incomes, from whatever source derived, without apportionment..." (apportionment was required under Article I of the Constitution, so had to be specifically addressed).  This amendment affects only the FEDERAL government.  For the states speciously to claim this affects them points only to desperation and grasping at straws. 

(NOT political; speaking truth about Constitutional issues as that is my other full-time job.  Please note the lack of smart-aleck comments about state spending.  But I thought them!)

[Edsel]

Not with my esteemed colleagues Jack and Catherine this time.  I would agree that the very states involved are those with ridiculously high taxes with fat governments, but that is the very core of the issue.  I would be happier if the new law denied the deduction for any taxes whatsoever than to ostensibly single out some states.  Constitutional law notwithstanding, I'm sure nothing in the constitution allowed for picking and choosing which states to favor or disfavor with regard to treatment.

I ought to be happy as a pig in slop.  My state has no income tax.  And I dislike governments in those states who delight in high taxes and fat governments determined to live off the public largesse.  But fair is fair.

Socially speaking, the even bigger losers in the new law are charities.

One thing I've noticed consistently during my career:  The govt has declared war on itemized deductions for 30+ years.  The standard deduction has moved upward with the cost of living, and numerous times the standard deduction has been legislated upward by leaps and bounds.  Add that to the number of deductions that have been disallowed (personal interest and ALL taxes prior to 1987, plus the fact that the 2% haircut was unheard of before 1986 code).  I would estimate in 1980 that 85% of all taxpayers itemized, and the latest projections for 2018 indicate only 8% of taxpayers will itemize.

And the future of itemized deductions?  I am told by some that the $24,000 std deduction will NOT increase with inflation, and that after 2023 the std deduction will revert back to 2017 levels.  I'm sure the writers of this law had a certainly that between now and then, congress will not leave the situation alone.  And they won't.

 

[Evan S. Golar]

This IS a state issue because the restriction in the amount a taxpayer is entitled to deduct for state income taxes and real estate taxes is greatly restricted, and will reduce the real estate values of taxpayers' homes. As well - unless the state legislatures act - it will increase the taxable income to the states (for those that follow the Federal format) by reducing the deductible real estate taxes on the state returns.

THAT'S HOW it's a STATE ISSUE!!!!!!!!!!!!!!!!!

[Catherine]

While I agree with @Evan S. Golar that this AFFECTS the states, that is far different from the claim that it is an unConstitutional law because of state effects.  Changes to bankruptcy law (authority given to the feds in Article I, Section 8 ) also affect the states - but that is a power given to the feds by the Constitution.

All the states to be affected could decide to cancel their income tax immediately and instead impose a state sales tax to fund their operations.  Or expand their lottery programs.  Whatever.  That is an area reserved for state control.  The high-tax states could be said to have been subsidized by the feds all these years because they allowed state taxes to be deducted, in full, from income (for itemizers).  Wasn't that the reason the no-income-tax states fussed until the IRS added state sales taxes in to the mix of what could be deducted?  Because it wasn't "fair" to deduct income tax but not sales tax, when a state chose the latter method for raising funds?
 

As for @Edsel's comments in his first paragraph - I happen to agree.  The federal system has been subsidizing both high-income-tax states AND private home ownership.  The original intention was to encourage home ownership and relieve some local tax burdens.  But as is usual for any government program with social content, no matter how good (and pure) the intent, eventually it has the opposite affect from what was intended.  Home ownership, because of the deduction for mortgage interest and property taxes, ultimately made it harder for people to buy, because prices increased.  Remember when credit card interest was a deduction?  When that went away, people started refinancing their houses to pay off their credit cards (turning short term fun like clothes and trips into thirty-year debt obligations), and we now have the task of teasing apart actual house (purchase or improvement) debt from what was used for the new car or the fancy vacation.  Even the charitable deduction - yes it rewards people for being kind (by lowering the cost of so doing) but it also tricks people into thinking that the government should be involved (even obliquely) in a decision to donate to a charity.  Hence the year-end "get your deduction!" drives every December.  

As for changes to the law in the future - what was it Mark Twain used to say?  Something about Congress being in session means we're all in danger....  We can only be certain that the law WILL be changed.  All other considerations are up for grabs.  

[SaraEA]

When congress first started drafting the new tax law, almost all itemized deductions were taken away (only charities and maybe mortgage interest left I think). The higher standard deduction was supposed to make up for it. (At that point in time no one realized that the loss of exemptions would eat up the increased sd.) Then the lobbyists came out in force, they needed this, needed that.  Congress was in such a rush to give the American people a "big Christmas present" that they just gave the loudest voices what they wanted.  The result is that most deductions were put back in and, instead of being revenue neutral, the tax cut is adding trillions to the deficit. Misc 2% deductions and casualty and theft losses were the only things dropped, although taxes and mortgage interest were limited for some taxpayers while contribution limits were raised.  The point is that the intent was to do away with most itemized deductions, but the result was to put most things back in in haste.

I live in a high tax state that is suing the feds over this.  CT tax is based on federal AGI, itemized deductions don't count.  The state's participation in the suit therefore must center on state residents missing out on their federal taxes because they pay so much in state taxes.  Some states that do allow itemization can and have upped the amount of state taxes their residents can deduct.  I'm with Jack on this one.  These states are claiming that the federal gov't is harming their residents, when the harm is coming from the states themselves that impose such high taxes on their residents.

[michaelmars]

Funny how NY also is fighting for this deduction but they don't give it themselves to NY residents.  NYers can't deduct any state taxes or property taxes on their NY return.

[Evan S. Golar]

What Governor Cuomo is fighting for is for real estate owners to get the maximum deduction for real estate taxes - not the state income tax. State income taxes are not deductible to arrive at a state tax liability. There's a difference.

[Roberts]

Doesn't the AMT already limit SALT deductions for most high tax payers? Yet nobody complains about that.

[SaraEA]

AMT is pretty much gone for all but the really high earners.  I have a NY client who will be able to claim $10k SALT on federal return but not the usual $88k in state and city income taxes and $28k in property taxes.  The lack of AMT will make up for some of this but by no means all of it.

[Edsel]

On 7/20/2018 at 8:26 PM, SaraEA said:

Then the lobbyists came out in force, they needed this, needed that.  Congress was in such a rush to give the American people a "big Christmas present" that they just gave the loudest voices what they wanted. 

These states are claiming that the federal gov't is harming their residents, when the harm is coming from the states themselves that impose such high taxes on their residents.

Whereas I believe the govt is discriminating against states with high taxes, I really like the "cause and effect" argument posed by SaraEA.  The harm HAS COME from the state governments themselves.  The federal tax law is simply picking and choosing which states to subsidize.

Over the weekend I listened to a radio show featuring an EA who had attended the IRS blowout in Las Vegas.  [Funny how they dislike business travel deductions to tourist resorts such as Myrtle Beach, Orlando, Niagara Falls, etc. when it comes to themselves they really love to go to Vegas]  Apparently there has been a lot of noise from constituents getting hit hard because of job expenses and the loss of the 2% category, and the general feeling is further tax relief is to come for this group.

Every group of "lobbyists who come out in force" to champion a favorite deduction also increases the deficit.

[Abby Normal]

10 hours ago, Edsel said:

favorite deduction also increases the deficit

When this bill was drafted, they had to lie to make it look revenue neutral. Then it went to negotiations and even lies couldn't make the end result revenue neutral. We're so screwed.

[Roberts]

On 7/23/2018 at 8:06 PM, SaraEA said:

AMT is pretty much gone for all but the really high earners.  I have a NY client who will be able to claim $10k SALT on federal return but not the usual $88k in state and city income taxes and $28k in property taxes.  The lack of AMT will make up for some of this but by no means all of it.

How much of their AMT tax bill was just a recapture of their deduction for taxes paid?

I have many clients who have been subject to the AMT and it is 100% a recapture of the taxes paid that they deducted on the Sch A. I don't see the rules change having a significant impact on their taxes.

 

[Lion EA]

Yes, the SALT gets added back to compute AMT on 6251.  But, then the AMT gets compared to regular tax, and only the highest results.  For instance, my typical clients with about $50,000 in SALT that would save them about $16,500 at their regular tax rate of 33%, have about $9,500 in AMT added to their 1040 due to the AMT top rate of 28%.  Even with AMT, they have a tax savings of $7,000 due to SALT -- in 2017.

I'm in CT with many NY clients and a few MA and PA and CA and IL and....  2018 is not going to be pretty.

[Catherine]

6 hours ago, Lion EA said:

2018 is not going to be pretty

that's the truth!

[Richcpaman]

Maryland is talking out of both sides of its mouth.

On one side, it is suing the Feds because they have "disadvantaged" Maryland.

On the other, when they clearly KNEW what the tax revenue windfall was going to be in 2018 (600 million plus) and proposed a law to reduce this bonanza, they pass a bill that raised the deduction amount by $500......   Or reduced the $600m to about $550m.

Hypocrites.

 

 

 

[Catherine]

22 hours ago, Richcpaman said:

Hypocrites.

Par for the course!

[BulldogTom]

On ‎07‎/‎31‎/‎2018 at 7:50 AM, Lion EA said:

I'm in CT with many NY clients and a few MA and PA and CA and IL and....  2018 is not going to be pretty.

Damn, your clients are all targets of the Trump Administration (maybe not PA? not up on that state).   You will need to send out "chill pills" to all your clients at the start of tax season because you are going to hear the same thing over and over again.   Good Luck.

Tom
Modesto, CA

[Lion EA]

One of my MA clients just became a PY MA and PY CA client.  I (yes ME) will also need chill pills to get through the tax season!

[Catherine]

1 hour ago, BulldogTom said:

to hear the same thing over and over again

Maybe we should make a recording and set it on a loop.  Clients start to complain, hit the "play" button and sit back.

[BulldogTom]

At the TNSEA conference I went to, the speaker told us every time people complain about negative effects on their tax returns to tell them...."But your getting lower tax rates!".

Not sure if that will work this year, especially in the high SALT states....like mine...CA

Tom
Modesto, CA

[BulldogTom]

5 hours ago, Lion EA said:

One of my MA clients just became a PY MA and PY CA client.  I (yes ME) will also need chill pills to get through the tax season!

Just fire them now....save the headache.   They can't be worth that much stress.  CA is going to have a boatload of non-compliance with federal law.   That PY return is going to take some time.  Your fee is going to have to cover that.   But....they are getting a lower federal tax rate....

Tom
Modesto, CA

[Catherine]

17 minutes ago, BulldogTom said:

Your fee is going to have to cover that. 

If you want to keep them, then tell them right now that they ARE going on extension and that your fee will be substantially more due to the state-to-state interactions.  And to make an estimated payment or two, to avoid underpaying.

[Edsel]

Bulldog Tom, and others in heavy taxed-to-death states.

How many of your clients are going to get suckered in to this siren song of making "contributions" in lieu of taxes?  I'm told a few states have been getting away with this in the last few years, and the IRS has not complained.  The benefit to the taxpayer in prior years?  I believe making contributions in lieu of taxes helped to avoid the tax add-back to the AMT.

The above is a tiny trickle of water compared to the dam-break that is going to happen this year.  California seems to have the idea that they can nullify whatever the federal govt decides to do.  The plan in CA appears to fail on merit because a deductible contribution can only be allowed to the extent that no offsetting benefit is received.

If the IRS enforces this, and millions of taxpayers do it, they are going to be busy.  And need more resources. If it takes them multiple 60-day letters before cleaning up their mess, they will never be able to stop this.

Remember the TurboTax crowd, already exempt from the ever-increasing audit form 8867, will not hesitate to deduct anything that resembles a charitable deduction.  Gives engineers and computer geeks yet another reason to use TurboTax instead of using a competent preparer.  Also these know-it-all people will not hesitate to deduct the full amount of interest on a 1098 instead of having to examine any non-deductible portion.  The new law would have been better off not allowing itemized deductions at all.