The new tax law overhaul places a $10,000 cap upon deductions on federal returns pertaining to state and local taxes. Yet a number of states are challenging this cap.
Four states (not including Michigan) filed a lawsuit against these provisions. Defendants in the lawsuit include the Department of Treasury and the Internal Revenue Service.
The plaintiffs feel the changes in the cap were politically motivated to punish states that did not vote for the current presidential administration. The concern is that these states will, in the words of one governor, be receiving less in deductions to pay “for corporate tax cuts” due to the tax overhaul.
Impact on the ability to deduct state and local taxes
Traditionally, taxpayers have been able to deduct state and local taxes (SALT deductions). Current reform reducing such deductions to only $10,000 raise a number of concerns.
The plaintiffs feel that this cap will have a negative impact upon economic growth, job creation, spending and the prices of homes. Commentators appear to believe that states hit hardest will be those living in states where the most significant amount of SALT deductions were taken (as compared to adjusted gross income).
This lawsuit in one sense is a challenge to the amount of power Congress already has.
However, one tax professor things the likelihood of success for this lawsuit is slim. Congress has tremendous leverage when carrying out its taxing authority. This power is especially on display when it comes to setting tax deductions.
Yet states may devise other ways to claim other sorts of deductions to make up for the new tax law. This could include schemes for funding various municipal services in order to give taxpayers the ability to claim more charitable deductions.
Challenges for taxpayers
The changes in law make it difficult for taxpayers to understand what deductions they can take. Also, confusion and ambiguities regarding the law also make for a greater chance of making mistakes. For this reason, it’s useful having a seasoned tax attorney on your side to explain tax changes and provide you your options when it comes to tax planning.