Here's how Californians may be able to skirt SALT cap

A top lawmaker in California introduced a bill this week to protect state residents who will be hurt by ...

Posted: Jan 7, 2018 8:44 AM
Updated: Jan 7, 2018 8:44 AM

A top lawmaker in California introduced a bill this week to protect state residents who will be hurt by a new $10,000 cap on how much they may deduct in state and local taxes on their federal returns.

The cap was one of the most controversial provisions included in a federal tax overhaul signed into law last month.

The proposed California workaround, by Senate leader Kevin de Leon, is the first of what are expected to be several legislative efforts in high-tax states to mitigate the impact of the SALT deduction cap on their residents.

The average state and local tax deduction claimed by Californians is well above the cap, at $18,438, according to de Leon's office.

To help ensure they can still deduct much or all of the state and local taxes they pay, de Leon has proposed letting residents make a charitable contribution to the state in exchange for a tax credit.

That way, the charitable contribution would be deductible on their federal return, since the new federal tax law doesn't limit deductions for charitable gifts except in certain instances.

Related: How high-tax states may try to get around the new SALT deduction cap

Here's how it would work: Californians would pay state and local taxes throughout the year just as they do now. But if they exceed $10,000 the resident taxpayer has a decision to make.

Say someone pays $19,000 total. At any point in the year, she could choose to make a $9,000 charitable contribution to the state. In exchange, the state would grant a tax credit, which would reduce her state tax bill by $9,000. When she files her federal tax return, she could deduct $10,000 for her state and local taxes plus $9,000 for her charitable contribution to the state.

Of course, that would require that taxpayer to pay $9,000 to the state before effectively getting it back as a tax credit when she files her return.

De Leon hopes to get the bill to the California Senate floor for a vote by the last week of January, his spokesman said.

Move could be viewed as legally questionable

Even if the California measure -- or measures like it in other states -- pass, some will argue the move is legally questionable.

For instance, a charitable contribution is typically not considered deductible if the donor benefits from it.

"If one purchases a $250 ticket to a benefit dinner, and the fair market value of the dinner is $50, then $200 can be deducted, not $250," Tax Foundation senior policy analyst Jared Walczak wrote in a paper examining the issue of proposed workarounds to the SALT deduction cap.

A contribution made in exchange for a 100% state tax credit, solely to lower a donor's federal tax liability, could be viewed as wholly benefiting the donor.

In addition, a contribution usually isn't considered deductible if it causes the recipient (in this case, the state) to incur a liability (having to provide a tax credit), Walczak notes.

As with many tax issues, though, there are often good counterarguments backed by case law and precedent.

Kirk Stark, a tax law professor at UCLA, notes there are many past examples in which the IRS and the courts have blessed the federal deductibility of state-level charitable contributions made in exchange for state tax credits.

Mississippi Coronavirus Cases

Data is updated nightly.

Cases: 149940

Reported Deaths: 3779
CountyCasesDeaths
DeSoto9953104
Hinds9892198
Harrison7045110
Jackson6270119
Rankin5462102
Lee501095
Madison4734106
Forrest380586
Jones354888
Lauderdale3425145
Lafayette321549
Washington3161107
Lamar289250
Oktibbeha244362
Bolivar240984
Lowndes234164
Panola219850
Neshoba2196118
Marshall213850
Leflore204790
Pontotoc199228
Monroe197377
Sunflower191655
Lincoln188765
Warren175357
Tate168051
Union166025
Copiah163040
Pike161658
Yazoo154239
Scott152129
Itawamba151534
Pearl River150867
Coahoma150143
Alcorn149628
Simpson146753
Prentiss144230
Adams141150
Grenada140645
Leake133543
Holmes129961
George124524
Tippah124530
Covington122238
Winston121624
Hancock120239
Wayne117223
Marion115846
Attala112234
Tishomingo108942
Chickasaw107132
Newton104229
Tallahatchie96827
Clay90327
Clarke89353
Jasper82022
Walthall76328
Stone76114
Calhoun73913
Montgomery73625
Carroll72115
Lawrence70814
Noxubee70617
Yalobusha70627
Smith70516
Perry66126
Tunica60619
Greene60022
Claiborne58316
Jefferson Davis56517
Amite53114
Humphreys53119
Benton49117
Quitman4897
Webster43414
Kemper42518
Wilkinson39422
Jefferson34811
Franklin3365
Choctaw3237
Sharkey30917
Issaquena1144
Unassigned00

Alabama Coronavirus Cases

Cases: 242874

Reported Deaths: 3572
CountyCasesDeaths
Jefferson31944500
Mobile19687361
Madison13065148
Tuscaloosa12983154
Montgomery12286236
Shelby1020377
Baldwin860398
Lee773566
Morgan653850
Calhoun6240119
Marshall621355
Etowah621066
Houston523038
DeKalb481336
Cullman435442
Limestone420645
St. Clair415855
Elmore404564
Lauderdale400454
Walker3634111
Talladega349054
Jackson313423
Colbert309342
Blount288840
Autauga271642
Franklin251033
Coffee242615
Dale231854
Dallas225932
Chilton221938
Russell22143
Covington218534
Escambia197931
Chambers176550
Tallapoosa175791
Pike158314
Clarke158019
Marion137936
Winston132323
Lawrence127336
Pickens122318
Geneva12138
Marengo121024
Bibb117317
Barbour117110
Butler115341
Randolph102021
Cherokee101524
Hale96131
Clay91124
Washington90919
Fayette89816
Henry8526
Lowndes79529
Monroe78711
Cleburne77114
Macon73122
Crenshaw71130
Bullock69419
Conecuh68414
Perry6846
Lamar6718
Wilcox63218
Sumter57722
Greene42418
Choctaw42113
Coosa3414
Out of AL00
Unassigned00
Tupelo
Clear
44° wxIcon
Hi: 57° Lo: 42°
Feels Like: 44°
Columbus
Clear
44° wxIcon
Hi: 56° Lo: 44°
Feels Like: 44°
Oxford
Clear
39° wxIcon
Hi: 54° Lo: 38°
Feels Like: 39°
Starkville
Clear
43° wxIcon
Hi: 54° Lo: 42°
Feels Like: 43°
WTVA Radar
WTVA Temperatures
WTVA Severe Weather