REPORT: I.R.S. Warns States Not to Try Circumventing State and Local Tax Cap

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WASHINGTON — The Internal Revenue Service is preparing to crack down on states that try to circumvent a new limit on the state and local tax deduction, saying on Wednesday that it will not allow local governments to find creative ways to help individuals fully deduct those taxes.

The I.R.S. warning comes in response to states, like New York, that have looked for ways to blunt the impact of a new $10,000 cap on the state and local tax deduction, known as SALT. The cap, which was included in last year’s $1.5 trillion Republican tax overhaul, hit predominantly Democratic, high-tax states hardest since it limits the amount of state and local sales, income and property taxes that residents can deduct from their federal taxes.

The article goes on to state the following:

That has prompted a scramble among local lawmakers to find ways to allow constituents who owe more than $10,000 to continue to fully deduct those taxes and avoid a tax increase.

The I.R.S. said it would not tolerate states that try to flout the law — a stance that is likely to be challenged in court.

“Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes,” the I.R.S. wrote in a notice released on Wednesday.

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