STUMP » Articles » Taxing Tuesday: I'm Sure Suing the Feds will Really Work for New Jersey » 18 June 2019, 06:20

Where Stu & MP spout off about everything.

Taxing Tuesday: I'm Sure Suing the Feds will Really Work for New Jersey  

by

18 June 2019, 06:20

If I remember correctly, my own state (New York) is already suing the federal government over the SALT cap (I hope they lose).

I suppose New Jersey is just a bit slower:

NJ CONSIDERS SUING IRS AFTER FEDS BLOCK STATE’S INCOME TAX SCHEME

State Attorney General Gurbir Grewal said he would consider legal action against the IRS over the Treasury Department decision that blocks a potential workaround to the cap on state and local tax deductions.

The Treasury Department issued final rules Tuesday that would clamp down on taxpayers trying to circumvent a new cap on state and local tax deductions.

…..
Some states, including New Jersey, tried to find workarounds. This included states allowing taxpayers to donate to charity funds and, in exchange, receive tax credits against their state or local taxes. Taxpayers could then deduct their donations as charitable contributions on federal taxes, lessening their broader tax burden.

But under the new regulations, taxpayers would only be able to deduct charitable contributions greater than the amount of the tax credit they received. For example, if a taxpayer donates $1,000 to a state program and receives a 70% credit, they could only claim $300 — not the $700 they may have been aiming for.

That’s what I expected would happen. The IRS folks know what they’re doing.

The regulations are “neither new nor surprising in clarity and direction” said Mark Steber, chief tax officer at Jackson Hewitt Tax Services.

He said the Treasury Department has been very clear from the get-go that any “creative interpretations or constructs intended to bypass the limitation” would be met with a negative response and potentially harsh consequences. While there have been many creative and alternative ideas for bypassing the limitation, Steber said they “all have been denounced by the most optimistic of tax experts.”

None of these “clever” tricks were going to work. I highly doubt any will win their lawsuits, and as I mentioned before, the main result of the SALT cap is that high-income folks living in high tax states (like me) got a much smaller tax cut than high-income people living in low tax states.

I have some happy news for my fellow New Yorkers (and people working in Connecticut): you don’t have to live here. I understand there’s no wall around Texas (from the north, at any rate). You can pack up and move to Houston.

Anyway, I’m hoping the SALT cap gets set to zero, which would simplify so many things.

Separation of Feds and States! Let’s Make Federalism Great Again!

GOVERNING MAGAZINE ON THE IRS RULE

So, let me go to my go-to (funny how that works) on public finance: Governing Magazine.

Final IRS Rules Leave States Few Options for Evading the SALT Cap

Sounds good to me!

Subhed:

“There is something to upset everyone in the IRS rule.”

I highly doubt that. But let’s check it out:

The IRS has officially blocked one of the ways that high-tax, Democratic states are letting residents circumvent limits on tax deductions.

The 2017 federal tax overhaul imposed a $10,000 cap on state and local tax (SALT) deductions, which can increase what some owe in federal taxes. In response, some states changed their rules to let people “pay” some of their state and local taxes into a state or local charitable trust because federal tax reform did not cap the deductiblity of charitable contributions.

This week, the IRS closed the charitable deduction loophole — and did so in a way that charities say will have a far-reaching impact.

“Wherever you are in the country or on the political spectrum, there is something to upset everyone in the IRS rule,” says the National Council of Nonprofits’ David L. Thompson.

Furthermore, it might be the first of several moves the federal government makes to end federal tax workarounds.

Ooooh, I like the sound of that! Seriously, what’s the downside? (The other items they would look at later are much more complicated workarounds… and if those are closed down, I would also be happy. But that’s not for this time.)

What the New Rules Do

That doctrine and another called “quid pro quo” are the basis for the new rules the IRS issued this week.

The IRS essentially expanded the quid pro quo doctrine to tax credits. For example, if someone donates to a charity and receives a tote bag in return, she is supposed to subtract the value of that bag from her charitable contribution when claiming it on tax forms. For residents receiving a tax credit when donating to a charitable trust, they have to now deduct the value of that credit from their contribution. It effectively blocks residents from claiming their entire payment to a state or local trust as tax-deductible.

The new IRS rule squashes charitable-trust-loophole laws passed by Connecticut, New Jersey, New York and Oregon. Similar proposals are pending in California and Illinois.

But the IRS language is so broad that it also applies to long-established state-run trusts (for things like environmental preservation and charter schools), which give out tax credits in exchange for donations. Dozens of states — not just high-tax or Democratically controlled ones — have these trusts. The rule applies to any donation from an individual who has already hit the state and local tax deduction cap.

I am just fine with that. Why wouldn’t I be?

I understand those running those trusts would be unhappy. But sorry, state-run charities are not actually charities. It’s just taken a lot of time to recognize that.

I’m pro SALT-cap-zero. I’m very pro-tax-simplification. And I’m very pro-decoupling-state-finances-from-federal-finances.

However, I found out something that pisses me off:

The SALT cap is temporary. It expires in 2025. There’s also a proposal in Congress that would repeal the cap, but it’s not expected to go anywhere. Some argue that states should simply wait to see if the politics on Capitol Hill shift in a way that diminishes support for keeping the cap.

via GIPHY

Talk about not paying attention to the details – I didn’t realize the SALT cap was supposed to sunset!

via GIPHY

Great. Just great.

INTERLUDE: PAYING TAXES IN CALIFORNIA

A friend was bitching about doing quarterly taxes in California. I didn’t realize how idiotic it is.

Here’s the official page on filing quarterly:

Important: California differs from federal. To avoid an estimate penalty, you must pay at least:
30 percent First quarter (April 15)
40 percent Second quarter (June 17)
0 percent Third quarter (September 16)
30 percent Fourth quarter (January 15)

Now, most states (and federal) taxes filed quarterly require you to make four equal payments. This, on the other hand, is idiotic.

Now, California thinks it’s being “clever” by having most (70%) of the cash flows in the first half of the year. And by “California”, I mean the California legislature.

But now one can see how California has screwed up finances. It has bad practices at its very core, trying to front-load cash flows for income, which might distort some people’s view about what the full year revenues would be.

ILLINOIS AND THE SALT CAP

SALT and the ‘Pritzker Tax’: One more reason for Illinois taxpayers to rebel

“People are mobile. And they will go to a better tax environment. That is not a hypothesis. That is a fact. People act in their own economic interest. Businesses act in their own economic interest.”

— New York Gov. Andrew Cuomo in February, blaming the flight of wealthy residents from his high-tax state on the newly limited amount of state and local taxes that are deductible on federal income tax forms

Since the passage of federal tax reform in late 2017, lawmakers in high-tax states have struggled to protect their wealthy constituents from a $10,000 limit on the federal deductibility of state and local taxes, aka SALT. As a wry CNBC headline put it, “Blue-state Democrats have a new cause: Helping millionaires.”

Limiting this deduction for high earners helps pay for tax cuts for American families of more modest means. Middle-income households are otherwise largely unaffected; the near-doubling of the standard deduction and the lower federal tax rates now in effect mean they’re less likely to itemize — and they owe less in federal taxes.

….

In Illinois, with its astonishing 7,000 local governments, the net effect is that affluent taxpayers now receive less subsidy from citizens of lower-tax states. In other words, Illinois taxpayers now pay more of the true cost of their state and local governments’ spending. And Illinois politicians no longer can mollify taxpayers with the old canard: Sure, we’re gouging you, but you can write off our high taxes on your federal return.

We’d like to report that Illinois state and local officials are responding by reducing spending and tax rates. Instead, their momentum is just the opposite, toward bigger budgets and higher taxes.

The “Pritzker Tax” — the governor’s proposed constitutional amendment to convert Illinois from flat to graduated income tax rates — at first would hit only the wealthiest 3 percent of taxpayers. But that’s just for starters. As more and more middle-income voters comprehend that the real goal is to handsomely raise their taxes too, they can rebel in two ways.

They can show up at school district, city council and other government meetings to demand less SALT in their lives.

And they can decide right now that on Nov. 3, 2020, they’ll vote down the Pritzker Tax.

Or, they can move elsewhere.

They may end up having to move, because a lot of these higher taxes go to paying the cost of services rendered decades ago. You may know these costs as pensions. There’s only so much, without amending the state constitution (oh hey!), the Illinois pols can do to lower these costs. They were already accrued.

TAX STORIES

This is the funniest thing about Murphy as governor of New Jersey. In a way, it’s the same problem the other rich guys who become governor have (whether Pritzker, Rauner, Murphy, Corzine) — it doesn’t matter the party. Governors, in many states, are term-limited. They definitely are in New Jersey. The legislators, however, can be legislating for decades. They want to be re-elected. This is their career. So they can go only so insane with the laws they pass.

They want to outlast the governor… and they probably will.

TAX TWEETS



He is referring to this story, in which it’s noted that Omar had filed taxes jointly with a man she wasn’t married to (at the time) while supposedly being married to somebody else (who may or may not be her brother.)




[well]



He unifies the electorate!


Must not be all that important, then.


Related Posts
Public Finance Spotlight: Truth in Accounting
More Puerto Rico: Round Up of Current Commentary and Followups
MoneyPalooza Monstrosity! Looking at the SALT Cap Provisions
| Main |