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Warning: IRS Proposes SALT Anti-Abuse Regulations

Warning: IRS Proposes SALT Anti-Abuse Regulations

By    |   Monday, 27 August 2018 09:15 AM

Taxpayers and their tax professionals know that the Internal Revenue Service takes a dim view of abusive tax arrangements.

The IRS, Congress, and the courts have all clarified that tax-shelters not specifically blessed, or at least informally countenanced, are not permitted.

Taxpayers must pay the amount the tax law requires.

Abusive tax arrangements open taxpayers and the promoters to significant civil, and maybe even criminal, penalties.

The IRS diligently tries to root out promoters of these abusive tax strategies and has a vast array of legal tools at their disposal.

But what if the tax shelter promoter is a state and not a person?

The Tax Cuts and Jobs Act of 2017 curtailed the federal income tax deduction for state and local taxes —although offset for most taxpayers with a much larger tax exemption.

High tax states enjoyed the benefit of taxpayers getting a federal deduction which enabled those states to impose excessive taxes.

The federal government was enabling errant state tax policies.

In California, for example, the average SALT deduction was $18,000 before the TCJA of 2017 but limited to $10,000 afterward.

New York, New Jersey, and California, which enjoyed big local and tax payments from upper-level taxpayers, had political temper-tantrums.

Typical of politicians they figured out how to get around the impact of the SALT limitation. They did not need taxpayers having even more impetus to move to a competing tax favorable state.

Although state tax authorities are solidly against abusive tax shelter schemes which lower state tax collections, the local political mentality thinks it’s OK when they do it to the federal government.

The Democratic leader of the California State Senate, Kevin de Leon, is reported as saying, “We’re attempting to come up with ways to negate and blunt the harsh and unfair Republican tax policy.” 

Organizing a wrongful structure to negate paying federal income tax is by definition an abusive tax shelter scheme.

What they are proposing is to create a state charity whereby the taxpayer can “contribute,” usually by way of credit, SALT taxes over the $10,000 federal limit.

New York and New Jersey have passed legislation while California and several other high-tax states are taking steps in that direction.

If this were this legitimate, then the taxpayer could take a charitable deduction for the excess. Federal tax collections get short-changed, and the state goes on its merry way.

The IRS, seeing these states as just promoting another illegal tax arrangement, issued a proposed regulation which disallows deductions categorized as a charitable contribution, but is just state and local taxes. 

The IRS, under longstanding federal tax principles, claims that there is no charitable intent since the taxpayer expects to get a financial benefit in return.

Recognizing political realities, the IRS carved out an exception.

For taxpayers in states that,  in effect, limit the credit against state tax to 15% or less, the proposed regulation allows the taxpayer a federal charitable deduction for the full amount of SALT tax.

The proposed regulation exception allows those states to continue with programs which, for example, helps schools and hospitals.

But where the deduction is more than the 15%, no deduction is allowed.

Professional tax return preparers need to be concerned since they have liability for making sure the taxpayer’s federal tax return complies with federal law.

At this moment the proposed SALT anti-abuse regulations look a winner for the IRS.

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.

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At this moment the proposed SALT anti-abuse regulations look a winner for the IRS.
warning, irs, salt, anti, abuse, regulations
Monday, 27 August 2018 09:15 AM
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