Tag Archives: State and Local Taxes

States sue U.S. to void state and local tax deduction cap

FILE PHOTO: New York Governor Andrew Cuomo speaks during an announcement in New York City, U.S., August 17, 2017. REUTERS/Brendan McDermid

By Jonathan Stempel

NEW YORK (Reuters) – Four U.S. states sued the federal government on Tuesday to void the new $10,000 cap on federal deductions for state and local taxes included in President Donald Trump’s 2017 tax overhaul.

The lawsuit by New York, Connecticut, Maryland and New Jersey came seven months after Trump signed the $1.5 trillion overhaul passed by the Republican-led Congress, which cut taxes for wealthy Americans and slashed the corporate tax rate.

Critics have said the cap would disproportionately harm “blue” states that tilt Democratic.

Tuesday’s lawsuit adds to the many legal battles between such states, including several with high taxes, and the Trump administration, which was accused of unconstitutionally intruding on state sovereignty by imposing the cap.

“The federal government is hell-bent on using New York as a piggy bank to pay for corporate tax cuts and I will not stand for it,” said Andrew Cuomo, New York’s Democratic governor.

The Department of the Treasury, which along with Treasury Secretary Steven Mnuchin is among the defendants, did not immediately respond to requests for comment.

Taxpayers have long typically enjoyed unlimited federal deductions for state and local taxes, known as SALT deductions.

Under the cap, individuals and married taxpayers filing jointly who itemize deductions may deduct only up to $10,000 annually for state and local income, property and sales taxes.

The four states said the cap will depress home prices, spending, job creation and economic growth and impede their ability to pay for essential services such as schools, hospitals, police, and road and bridge construction and maintenance.

According to the Tax Foundation, the four states and California, which all favored Democrat Hillary Clinton in the 2016 presidential election, may be particularly hard hit, based on SALT deductions as a percentage of adjusted gross income.

New Yorkers claimed an average $22,169 SALT deduction in 2015, the Tax Policy Center said.

UPHILL BATTLE

David Gamage, an Indiana University tax law professor, said the lawsuit faces an uphill battle, despite suggesting that keeping the SALT deduction was a factor when states in 1913 gave Congress power to levy income taxes through the 16th Amendment.

“I think it’s very unlikely that it succeeds,” he said. “The Supreme Court has generally given Congress wide latitude in carrying out its taxing power, especially in setting deductions. It would be a pretty dramatic change of direction to allow this lawsuit.”

In the complaint filed with the U.S. District Court in Manhattan, the states said the $10,000 cap “effectively eviscerates” a deduction that has been on the books since 1861.

They also said it will force New York taxpayers alone to pay $14.3 billion more in federal taxes this year, and another $121 billion through 2025, when the cap is scheduled to expire.

By imposing the cap, Congress was able to “exert a power akin to undue influence” over states by interfering with their authority to decide taxes and fiscal policy, the lawsuit said, quoting Supreme Court Chief Justice John Roberts.

In May, the Treasury Department said it would propose regulations to stop states from circumventing the cap.

New York, Connecticut and New Jersey had already adopted “workarounds” letting taxpayers fund municipal services by paying into specified funds and claiming deductible charitable deductions.

The case is New York et al v Mnuchin et al, U.S. District Court, Southern District of New York, No. 18-06427.

(Reporting by Jonathan Stempel in New York; Editing by Chizu Nomiyama and Susan Thomas)

An update on winners and losers on the U.S. tax scorecard

A man walks the campus of the City College of New York in the Harlem borough of New York, U.S., December 16, 2017. REUTERS/Eduardo Munoz

By Beth Pinsker

NEW YORK (Reuters) – In the lead-up to the conference agreement for the U.S. Tax Cut & Jobs Act released on Friday, there were too many moving parts for most Americans to know how it would affect them.

Until the bill is voted into law, the various provisions are still a moving target, but taxpayers now have a better sense of the real math of what it means to them.

Here is an update on what some of the key issues would mean to your wallet:

* EDUCATION

Graduate students pleaded with Congress not to adopt the U.S. House of Representatives’ proposal to make tuition waivers count as taxable income. In the end, the conference bill left that provision out.

The final bill still allows for individuals to deduct up to $2,500 in student loan interest and retains the current selection of higher education tax credits.

Teachers can continue to deduct up to $250 in supplies. Employees can still receive tuition without claiming it as income.

However, the bill changes the rules for the use of contributions to 529 college savings plans. In the past, the funds could only be distributed for higher education expenses. The final bill allows for $10,000 a year to be taken for each child’s K-12 expenses.

* CHARITABLE DEDUCTIONS

The charitable deduction was never going to go away, but experts predict many fewer people will itemize deductions under the new rules, which almost double the standard deductions and get rid of personal exemptions.

People who expect not to itemize their taxes in the future should think about making major donations before Dec. 31 to capture as many tax advantages as they can.

The compromise in the tax bill to double the estate tax exemption also would affect charitable giving because fewer wealthy people will need to donate assets to avoid going over the limit and sticking their heirs with a tax bill.

* CHILD TAX CREDITS

The conference bill settles on a $2,000 per child deduction, with $1,400 of it refundable to people with no income tax liability. The deduction is now phased out at a much higher income level.

These credits will help offset the tax bill’s removal of personal exemptions, which would hit families with children hard.

* MEDICAL DEDUCTIONS

There is good news for those worrying that the tax overhaul will do away with the itemized deduction for medical expenses.

The conference bill not only keeps the deduction, it also makes it available for expenses above 7.5 percent of adjusted gross income for the next two years, rather than the recently established 10 percent threshold.

* ALIMONY

Get ready for a flood of divorces in 2018. The final bill does away with a tax deduction for paying alimony and with the need for those receiving alimony to claim it as income, but it delays this until 2019.

Those who were rushing to get divorced by Dec. 31 can take a deep breath. But as the news sinks in, expect couples where one spouse is anticipating alimony to file for divorce sooner rather than later, or face tough negotiations on how much he or she might get.

* STATE AND LOCAL TAXES

The compromise in the final bill is that filers will be able to claim $10,000 in some combination of state and local taxes, including real estate taxes. The cap on mortgage interest was bumped down from $1 million to $750,000.

There has been a lot of worry that the proposed changes would dampen home sales because it will change the math on affordability. While the final bill ended up better for homeowners than expected, there are still lingering questions about its impact.

* BRACKETS AND AMT

For those on the lower end of the income scale, the change in brackets will probably not be top of mind, at least until the Internal Revenue Service sorts out the final tax tables and starts to adjust withholding rates, probably sometime in late winter.

Wealthy Americans are getting somewhat of a mixed bag, however. The top rate is dropping to 37 percent, but the Alternative Minimum Tax remains.

While this sounds like something to mourn, the AMT might not have as big an impact as people generally believe.

* RETIREMENT SAVINGS

When the tax overhaul process started, the way we save for retirement was on the table for big changes, including to workplace 401(k) retirement savings plans. In the end, however, Congress left it all pretty much alone.

(Editing by Lauren Young and Lisa Von Ahn)