IRS Shuts Down State Tax Workaround

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The IRS has released proposed regulations that would shut down some suggested workarounds for the new $10,000 limit on the deductibility of state and local taxes (SALT). The new guidance would close the door on a strategy offered by some states to circumvent the deduction limit by attempting to turn the taxes paid into charitable contributions not subject to the same cap.

Background

Historically, if you itemized deductions on your federal income tax return, you could generally claim a deduction for taxes paid to state and local governments, including income and property taxes (or sales tax in lieu of income tax). For 2018 to 2025, the deduction for state and local taxes is limited to $10,000 ($5,000 for married taxpayers filing separate returns).

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