The Internal Revenue Service closed a loophole on Tuesday the Murphy administration and legislative leadership were hoping to use to bypass at $10,000 federal cap on state and local property tax deductions.
Lawmakers and Gov. Phil Murphy approved the workaround last year that would let residents to pay their property taxes as “charitable contributions” – which have no caps on the number of tax deductions that could be made on federal tax returns – to the town where they live.
Under the IRS’ new rules, if a taxpayer received a benefit from their local government for state or local taxes, they’d have to reduce the amount claimed for charitable deductions on their tax returns.
The IRS today made clear it is not interested in fairness for New Jersey’s taxpayers. Instead, it protects President Trump’s politicization of the federal tax code.
– Gov. Phil Murphy
U.S. President Donald Trump signed the cap as part of the federal tax overhaul in 2017, and the move was seen as a major blow towards typically blue-leaning states where the property tax bills can sometimes reach double the $10,000 cap.
“The IRS today made clear it is not interested in fairness for New Jersey’s taxpayers. Instead, it protects President Trump’s politicization of the federal tax code,” Murphy said in a statement Tuesday. “Finalizing a rule that prohibits us from following decades of precedent to protect our residents’ tax deductions is a gut-punch to middle-class families who know that the Trump tax plan is a complete sham.
Two members of New Jersey’s Congressional delegation – Democratic U.S. Sen. Bob Menendez and U.S. Rep. Josh Gottheimer – also lambasted the IRS’ Tuesday decision.
“Not surprisingly, the Trump Administration is once again taking a swipe at New Jersey’s middle-class taxpayers,” Menendez said. “The IRS has allowed these charitable funds for decades and is only now banning them because states like New Jersey sought to utilize them and establish its own.”
But New Jersey lawmakers are still moving ahead with a similarly-goaled SALT workaround for certain business owners.
Senate Bill 3246 would let business owners pay their state taxes through the businesses they own rather than out of their own pocket.
The measure would apply to the owners of S-corporations, limited liability companies and partnerships and allow them to shift the tax liability of the state income tax they owe from themselves to their business and pay it through that entity.
Whatever the business owner paid, they would receive that amount as a tax credit against what they owe to the state.
The amount each business owner pays depends on their share of profit and the tax rate they already pay on that profit. Federal law does not cap how much these types of business owners deduct for state and local taxes.