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SALT Deduction Limits Under Tax Reform: State Tax Planning Workarounds and Strategies

Employment Tax Credit Initiatives to Counter Federal Tax Increase Due to Lost SALT Deductions, IRS Response

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, November 20, 2018

Recorded event now available

This course will guide tax advisers to individuals and closely held businesses on how to mitigate the impact of the tax reform law limitation on the deductibility of state and local taxes on a taxpayer’s federal income tax return. The panel will outline various states’ actions to try to work around the limitations and lessen the tax cost, discuss the IRS’ reaction through proposed regulations, and outline practical strategies in light of the Service’s stated positions.

Description

A controversial feature of the tax reform law imposes a $10,000 cap on the amount of total state and local taxes (SALT) a taxpayer may claim as an itemized deduction from federal gross income. Because this limit disproportionately affects taxpayers living in states that have high property taxes or impose an income tax, numerous state legislatures have sought to blunt the impact of the cap on their resident taxpayers.

States have explored options such as reducing state income taxes while making up that revenue with state-imposed employer payroll taxes or giving additional income tax credits or deductions to taxpayers. Connecticut Public Act No. 18-49 imposes a tax on pass-through entities, offset by a personal income tax credit on the pro rata share of taxes paid by owners of the pass-through entity, while New York enacted an optional employer-level payroll tax which allows employers to take a credit against their state personal income tax liability for wages paid above a threshold. California has also proposed the use of tax credits to offset an individual’s state income tax liability.

In Notice 2018-54, the IRS announced it would propose regulations to disallow the use of these state-level workarounds. Tax professionals and advisers must understand the impact of enacted and proposed state tax laws, and any resulting IRS response, to avoid potentially costly tax issues arising from attempts to mitigate the effects of the federal SALT deductibility limitations rules.

Listen as our experienced panel provides practical guidance and strategies to lessen the impact of the SALT deduction limitations in the tax reform law.

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Outline

  1. Overview of federal SALT deduction limitations
  2. Connecticut’s new tax law for pass-through entities and personal income tax credit
  3. New York’s employer level payroll tax
  4. California and other state bill proposals to relieve state tax burdens of taxpayers
  5. Strategies to limit or offset federal SALT deduction limitations

Benefits

The panel will discuss these and other relevant topics:

  • Understanding the federal SALT deductibility rules and limitations
  • Overview of state initiatives to respond to the cap on SALT deductions
  • IRS position on state workarounds for charitable contributions, prepayments, and tax credits
  • Available strategies to offset state tax liability as a counter to lost federal deductions

Faculty

Pascal, Elizabeth
Elizabeth Pascal
Partner
Hodgson Russ

Ms. Pascal concentrates her practice in tax law with a focus on New York State, New York City, and multistate tax...  |  Read More

Pope, David
David Pope
Partner
Baker & McKenzie

Mr. Pope's practice focuses on state and local corporate income tax, sales and use tax, property tax, payroll tax,...  |  Read More