The Internal Revenue Service and the Treasury Department issued a notice Friday saying they intend to issue regulations around estates and non-grantor trusts, which may affect one tactic that some wealthy taxpayers have been using to get around the cap on deducting local property taxes under the new tax law.

In Notice 2018-61, the IRS and the Treasury said they plan to release regulations to provide clarification on the effect of section 67(g) of the tax code overhaul on the deductibility of certain expenses described in section 67(b) and (e) that are incurred by estates and non-grantor trusts.

The Tax Cuts and Jobs Act that Congress passed last December sharply limits the deductibility of state and local taxes, including income, sales and property taxes, to $10,000 per year. In response to the new law, tax practitioners and some state governments have been devising ways to get around the new limits. One strategy that has emerged is the use of non-grantor trusts. Some wealthy taxpayers are setting up limited liability companies for their residences in high-tax states such as New York and then transferring interests in them to separate trusts set up in low-tax states such as Alaska, where each trust can claim up to a $10,000 deduction for property taxes (see Rich looking to dodge property tax caps turn to Alaskan trusts).

The IRS and the Treasury Department already announced in a separate notice back in May that they plan to discourage taxpayers from using state-run charitable funds as a way to get around the limits on the state and local tax deduction (see IRS and Treasury plan crackdown on SALT deduction workarounds). However, they indicated in Friday’s notice that they are more inclined to allow the non-grantor trusts to be used. They said the upcoming regulations "will clarify that estates and non-grantor trusts may continue to deduct each expense that is described in section 67(e)(1) or is allowable under section 642(b), 651 or 661, in determining the estate or non-grantor trust’s adjusted gross income for all taxable years, even while the application of section 67(a) is suspended pursuant to section 67(g)."

A man walks past the IRS headquarters in Washington, D.C.
Andrew Harrer/Bloomberg
Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.