Senate Minority Leader Charles Schumer, D-N.Y., is urging the Internal Revenue Service to back down on threats to challenge New York State’s efforts to allow taxpayers to circumvent the limits on state and local tax deductions in the federal tax overhaul.
The Tax Cuts and Jobs Act that the Republican-led Congress passed last December included provisions limiting state and local tax deductions to no more than $10,000 a year, despite objections from Democrats that the restrictions would hurt taxpayers in so-called “blue states” where state and local taxes can be high. Several states, including New York, New Jersey and California, announced plans to provide taxpayers with workarounds, such as contributing money they would otherwise pay in state income taxes to state-run charities, where there is no limitation on charitable deductions, or to have more money withheld from their paychecks in the form of payroll taxes.
In April, New York State passed a fiscal 2019 budget containing provisions that allow taxpayers to pay taxes to either of two state-run charitable contribution funds or to opt in to a new voluntary payroll tax system known as the Employer Compensation Expense Program (see New York tax changes respond to federal tax law). However, last month the IRS and the Treasury Department announced that they plan to issue proposed regulations to prevent states from circumventing limits on the state and local tax deduction (see IRS and Treasury plan crackdown on SALT deduction workarounds).
Schumer complained during a speech Monday in Westchester County that the IRS was treating New York unfairly after threatening taxpayers last year who tried to prepay their property taxes after the tax overhaul was passed. He called the IRS’s attempts to challenge New York’s new tax law shortsighted and a potential infringement of states’ rights.
“Put simply, the feds are going out of their way to raise taxes on hardworking middle-class homeowners in Westchester and Rockland Counties,” said Schumer. “First, it was the far right pushing a tax bill which was crafted to raise taxes on many middle-class families while lining the pockets of the ultra-wealthy. Then, New Yorkers had to deal with the IRS undermining taxpayers from prepaying taxes prior to January 1, 2018 to avoid steep tax increases. Now, the IRS is at it again, and is now attempting to undermine a New York law that lowers taxes for thousands of Hudson Valley residents. It couldn’t be more apparent the IRS is targeting middle-class homeowners in New York.”
Schumer said New York State’s new tax law would provide a charitable tax credit of 85 percent for donations to state funds that will go towards vital healthcare and public education programs. The donations could be treated as a charitable deduction under the federal tax code. New York State also authorized municipalities within New York to set up similar tax credit programs in an effort to ease the limits on state and local tax deductions to $10,000. Schumer pointed out that Westchester homeowners have the highest property taxes in the U.S.
He pointed out that similar state charitable tax credits exist in 32 states and have long been found by the IRS to be admissible. He wants the IRS to issue unbiased guidance to make it clear that donations to New York State’s charitable funds will be treated like charitable contributions to other state-operated charitable funds. Schumer said the IRS should reverse its plan and stop targeting states like New York directly or indirectly. He promised to hold to IRS accountable, and urged them to implement the new tax law as written.
“Let’s call this plan what it is — an attempt by the feds to undermine a state’s ability to provide tax relief to residents unfairly targeted by the Republican tax bill,” said Schumer. “Thirty-two states already provide tax incentives to donate to state charitable funds. The IRS has never weighed in on these state’s tax incentives, but the IRS is attempting to change the rules and hit hard-working Westchester families right between the eyes by potentially blocking New York’s new tax law. That is why I am calling on the IRS to stand down from attempts to undermine New York’s new law that provides Westchester and Rockland residents, the top two taxes counties in the country, with much needed tax relief from the tax bill’s most unfair and harmful laws.”
Schumer also wrote a letter to IRS acting commissioner David Kautter about the matter. "Any attempts by the IRS to alter the federal tax treatment of charitable contributions where the donation entitles the donee to a state or local tax credit would upend years of precedent, infringing on the rights of states and municipalities to provide local tax benefits for charitable contributions," Schumer wrote. "The new federal tax law, P.L 115-97, significantly raised taxes on many New Yorkers and diminished tax incentives for many to contribute to charitable causes. The cap on federal state and local tax deductions raised taxes on residents of states like New York, who were already net-contributors to federal coffers. After their residents were targeted for additional federal revenues, New York, and other states established programs to incentivize giving to state-operated charitable funds and mitigate the effects of the new tax increases."
"Unfortunately, the IRS’s recent notice appears to be an attempt to target state tax credit programs, like New York’s, developed after the new tax law," he added. "The donations to these new state-operated charitable funds should be fairly treated by the IRS as charitable donations, with no reduction in their value due to the states’ tax credits. Any attempts to undermine the value of donations made to New York State’s new charitable funds through the federal tax code would diverge from years of precedent. "
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