Senate Democrats Fight IRS Ban on SALT Deduction Cap Workarounds

Senate Democrats are attempting to nullify the recently finalized Treasury and IRS rules prohibiting state workarounds to the new federal $10,000 limit on state and local tax (SALT) deductions.

Senate Minority Leader Chuck Schumer, D-N.Y., led the introduction on July 16 of S.J. Res. 50 under the Congressional Review Act to “restore states’ ability to work around the harmful caps, and allow homeowners to again fully retain their SALT deduction.”

Shortly after the SALT deduction cap was enacted under the sweeping 2017 tax law, New York and New Jersey passed laws allowing taxpayers to recharacterize most state and local taxes as a charitable contribution to a specific fund that would then qualify for a federal tax deduction and state tax credit.

The senators note that while the Treasury Department blocked states’ workarounds for individuals, Treasury in September 2018 issued guidance that allowed businesses to continue to benefit from these same workarounds.

Schumer said Thursday in a media conference that Senate Democrats would attempt to overturn the rule through the Congressional Review Act, which gives Congress 60 legislative days for both chambers to repeal the rule. The IRS issued the final rules in mid-June. They will be effective Aug. 12.

“As if the Trump-Republican tax bill wasn’t already bad enough for middle-class families, these new IRS regulations are another kick in the gut to homeowners in New York State and across the country,” said Schumer in announcing the resolution. “The IRS is seeking to deny hardworking homeowners the benefit of the full SALT deduction while continuing their tax giveaway to the wealthiest few and corporations.”

The senators, Schumer said, are “fighting back with a CRA Resolution of Disapproval, which is guaranteed a majority threshold up-or-down vote, [and] would overturn the IRS’ recent attempt to block states from implementing workaround plans, and would allow homeowners to again fully receive this tax benefit.”

The CRA, added Sen. Bob Menendez, D-N.J., “will reverse the flawed guidance issued by the IRS last month, which crippled state-level efforts to protect middle-class families from even higher property tax burdens.”

Menendez has also introduced the SALT Act, which would “fully reinstate the property tax deduction” and restore the 39.6% individual income tax rate bracket.