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Tax Deductions Blog

IRS to Issue Regulations Addressing $10,000 Limit on State and Local Tax Deduction

Authored by Amy E. Ebeling
Amy E. Ebeling
Attorney
Wausau Office

Posted on May 24, 2018
Filed under Tax Deductions

Yesterday, the IRS issued Notice 2018-54 and an accompanying news release stating that proposed regulations will be issued addressing the deductibility of state and local tax payments for federal income tax proposes.

As many of you know, the Tax Cuts and Jobs Act (TCJA) limited the amount of state and local taxes an individual can deduct in a calendar year to $10,000.  In response to that limit, some state legislators have adopted or are considering proposing legislation allowing taxpayers to make payments to government established funds in exchange for credits against their state and local taxes.  The goal of such state legislation is to allow taxpayers to characterize the payments to government funds as deductible charitable contributions for federal income tax purposes, while using the same payments to satisfy their state and local tax liabilities.

Notice 2018-54 reminds taxpayers that federal law determines the proper characterization of payments for federal income tax purposes, not state law.  The Notice further states that the proposed regulations will address the federal income tax treatment of transfers to funds controlled by state and local governments that the transferor can treat in whole or in part as satisfying state and local tax obligations.

More to come on the TCJA as the IRS issues regulations and prepares for the 2018 filing season.