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Feds clamp down on SALT workaround, Murphy vows legal action

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Gov. Phil Murphy signing the State and Local Tax Deduction into law in East Rutherford in May of this year.
Gov. Phil Murphy signing the State and Local Tax Deduction into law in East Rutherford in May of this year. - ()

Gov. Phil Murphy said his administration is eyeing continued legal action against the federal government over their efforts to block New Jersey’s proposed workaround for the federal cap on state and local property taxes.

On Thursday, the Internal Revenue Service unveiled new rules that would prevent residents of high-tax states such as New Jersey from being able to pay their property taxes as charitable contributions and deduct those payments from their taxes.

Under the IRS’ proposals, if a taxpayer received a benefit from their local government for state or local taxes, they’d have to reduce the amount claimed for charitable deductions on their federal tax returns.

“For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit,” reads the proposed rules. “The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return.”

The proposed rules allow charitable deductions to be claimed in full up to 15 percent.

“New Jersey has led the charge against President Trump’s unfair and arbitrary cap on the SALT deduction, which was nothing more than a tax hike on working and middle-class families.”

– Gov. Phil Murphy

In a Thursday statement, Murphy said his administration is closely “examining all legal avenues against the federal government to protect New Jersey taxpayers from being unfairly targeted by the President.”

“New Jersey has led the charge against President Trump’s unfair and arbitrary cap on the SALT deduction, which was nothing more than a tax hike on working and middle-class families,” he said.

The Republican tax law enacted by the Trump administration in Dec. 2017 set the deduction limit at $10,000, which in several New Jersey towns is less than half of what their residents pay in property taxes.  

Democrats had said the law will hit many New Jersey residents in their wallets. Murphy in turn signed the charitable contribution as a workaround to the new federal cap in May.

 “Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families,” Treasury Secretary Steve Mnuchin said in a statement. "The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions.”

New Jersey Attorney General Gurbir Grewal, in a Thursday statement, said his office would be willing to file further legal action over the SALT cap on top of that rolled out in July, arguing the law specifically targeted Democratic-leaning states.

“There doesn’t appear to be any good basis for the sudden change in policy, except to make it more difficult for states like New Jersey to cope with the backward tax policies the federal government imposed on us last year,” Grewal said.

Connecticut, New York and Maryland are co-plaintiffs in that suit.

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Daniel J. Munoz

Daniel J. Munoz


Daniel Munoz covers politics and state government for NJBIZ. You can contact him at dmunoz@njbiz.com.

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