STUMP » Articles » Taxing Tuesday: Closing the Imaginary Loophole and High Tax State Reality » 28 August 2018, 07:12

I call it an imaginary loophole because it was never going to work.

IRS Moves to Block Blue States From Getting Around GOP Limits on Tax Deductions

The Trump administration has delivered another blow to California.

The Internal Revenue Service and Treasury Department on Thursday moved to block efforts by lawmakers in California and other Democratic-controlled states to help their residents avoid a new limit on state and local tax deductions.

The proposed rule targets legislation in those states that would allow taxpayers to claim a charitable deduction for state and local tax payments above the $10,000 limit set in the tax cuts passed by Congress last year.

The Treasury Department said the legislation being considered in various state s amounts to a tax dodge for wealthier Americans.

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The IRS will accept comments on the rule through Oct. 11 and then will hold a public hearing on it Nov. 5.

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California and New York are among the states that have been looking for ways around the limit on state-and-local tax deductions that Republicans included in the $1.5-trillion tax-cut law that took effect Jan. 1.

Many of the states hardest hit by the limit are high-tax ones controlled by Democrats, and leaders there have complained the tax bill targeted the deduction for political reasons.

A bill from state Sen. Kevin de Leon (D-Los Angeles) would allow California residents to circumvent the new $10,000 deduction limit through a complicated process involving state tax credits for contributions to school districts, charter schools, child-care centers operated by local educational agencies and community college districts.

Under the bill, taxpayers would be able to deduct 100 percent of the contributions on their federal tax returns because there are no limits on charitable deductions.

But the Treasury rule released Thursday would require taxpayers to reduce the federal charitable tax deduction they are claiming by the amount of any credit they receive on their state and local taxes. That would effectively prevent taxpayers from circumventing the cap through the workaround programs.

Why they thought they could ever be “clever”… hell if I know.

So the IRS got it out there, and the tax pros have to tell clients “Sorry, you can’t use bogus state charities as a deduction”. Yes, there is a lawsuit out there, but not about the bogus charities. So you can’t use this as a workaround.

Trying to claim those deductions when the IRS explicitly said NUH UH months ahead of time… is going to get you in the same place as the “sovereign citizen” crap. You, as an individual, are not going to win this.

via GIPHY

There is some collateral damage:

Some tax law experts also have said that it would be very difficult for the IRS to prohibit efforts designed to circumvent the state-and-local tax-deduction limit without also disallowing the federal tax deduction for contributions to more than 100 existing charitable programs in 33 states.

Those programs, many of them in Republican-controlled states, fund state-supported activities such as public schools and college scholarship programs.

The Treasury Department said Thursday that it expected some spillover effect on those other programs, but that only about 1 percent of taxpayers would see an effect on tax benefits for donations to school tax credit programs.

Those were iffy programs to begin with. Various tax experts (like the “NY can totally release Trump’s tax returns!” guy) thought that the IRS wouldn’t pull this trigger because of the various state “charities” that already existed, mostly in states with Republican governors/legislatures.

Guess what? You were wrong.

YES, NEW YORK IS A HIGH TAX STATE

Governor Cuomo is having a hell of a time with truth.

Did he misspeak here?

[Governor Cuomo] also shot backed [sic] at Trump’s claim earlier in the week that New York is the highest taxed state, calling it inaccurate and describing the president as “vindictive, and petty, and small.”

“No, Mr. President, you’re supposed to know numbers right? I lowered taxes — he knows that because he was a New Yorker. He raised taxes in New York when he passed tax reform with a poison pill — a missile aimed at New York — that eliminated the deductibility of state and local taxes,” Cuomo added.

Look, dumbass, if NY is not a high-tax state, then why are you wasting my tax dollars on this dumbass lawsuit?

But hey, let me do a fact check!

The Tax Foundation has a handy guide to state taxes. Let’s see where New York lands.

State and Local Individual Income Tax Collections per Capita: $2789
Rank:1

State and Local Tax Burden: 12.7%
Rank: 1

Tax Freedom Day: May 11
Rank: 48 (oh wait, this isn’t up to date.. in the 2018 ranking it’s at 50 CT and NJ (tied) slipped underneath.)

State Business Tax Climate Index Ranking: 49

State Sales Tax Rate: 4.00%
Rank: 40

Combined State and Average Local Sales Tax Rate: 8.49%
Rank: 10

State and Local General Sales Tax Collections per Capita: $1457
Rank:10

State Gasoline Tax Rate (cents per gallon): 44.3¢
Rank: 5

State Cigarette Tax Rate (dollars per 20-pack): $4.35
Rank: 1

Property Taxes Paid as a Percentage of Owner-Occupied Housing Value: 1.40%
Rank: 14

State and Local Property Tax Collections Per Capita: $2697
Rank: 4

Okay. Look. New York isn’t tops or bottom of the list in every ranking.

BUT IT’S PRETTY DAMN CLOSE.

TAX-RELATED VIDEOS

Thanks to Marc Whinston, who pointed these out to me:

“One skinny chicken…or tax”, The Honeymooners’ “Worry Wart” aka “tax” episode

Ralph goes into a panic when he gets a letter from the Internal Revenue Service ordering that he appear at their office the next morning, fearing that the IRS is investigating him for income tax evasion.

A quote:

Ralph Kramden: Penalty for failing to report income: All persons are required under this title to pay an estimated tax, or tax. All are required by this title or by regulations made under authority thereof to make a return other than a return required under authority of section 6015 or section 6016, keep any records or supply any information and who willfully fails to pay such estimated tax, or tax, make such returns, keep such records, or supply such information.

Ed Norton: Boy, Ralph, it sounds like you are in trouble.

Ralph Kramden: Trouble? I don’t even know what I’m talking about!

Odd Couple IRS hates oscar

Odd Couple IRS loves felix

YouTube comments aren’t always useless:

This story line was stolen from Gleason.

The Odd Couple: The Ides of April

During a meeting with the IRS, a distraught Felix gets Oscar called in for an audit after a few misspoken words.
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At the end of this 1973 segment, Oscar is presented with a bill of what he owes the IRS and jokingly asks the IRS agent “Do you take credit cards?” As of 1998, they do.

By the way, the Ides of April isn’t actually April 15. The reason I know this is I believe Isaac Asimov used this fact in a short story (he loved trivia like that). The Ides are usually on the 13th of the month, excepting March, May, July, and October. So the Ides of April is April 13.

Anyway, at least I don’t have to worry about the bogus charity fix anymore. And I really hope the payroll tax idea gets shelved. And other “cleverness” gets booted. All that’s left is the lawsuit against the feds to be dismissed. I don’t think it will make it to the Supreme Court, but we’ll see.

Take your medicine, high taxing politicians. Choices have consequences.