Certainty? Certainly Not Anymore!
In this world, there are reportedly only two things that are certain, death and taxes. And now taxes may not be all that certain either!
The New And Improved Federal Tax Law Redux? Maybe New; Maybe Not So Improved
Just before Christmas, Trump signed into law a new tax bill “gifted” to him by Congress, in this instance spelled GOP.
Cutting Back on Your SALT (Intake), But Charity is Still Sweet
One of the federal tax “loopholes” “shut down”, beginning in 2018, is the ability to deduct your “state and local taxes, commonly referred to as “SALT,” from your federally taxable income.
One of the federal tax “loopholes” NOT shut down is the ability to federally deduct your “charitable contributions.” If you make a $100 charitable deduction in a given tax year, you can subtract that $100 from your federally taxable income in that year. If, say, you’re in the 40% bracket for federal income tax purposes, that $100 deduction will reduce your federal income tax by $40. In other words, the federal government will return to you, or pay for you, $40 of your $100 charitable contribution.
What’s in a Loophole You Say? Depends on Who’s Saying
Why are these two items, SALT and charitable contributions, among others, referred to as loopholes? The answer is that this label is used as a matter of political convenience by anyone who opposes the particular deduction. It is self-serving. Those against the deduction call it a loophole; those in favor of the deduction do not concede that the item is a loophole.
Taking a Closer Look at the Loopholes
Charitable deductions were not shut down because they’re POLITICALLY popular and, therefore, it would have been bad POLICY to discourage such contributions by cutting off their deductibility. One of the FEW things on which both sides of the aisle agree is that charitable contributions should be encouraged, including continuing to permit their deductibility.
SALT payments are not as apple pie, motherhood or the American flag as charitable contributions. For starters, charitable contributions are voluntary. SALT payments are not. Like federal income tax, SALT payments are a means of generating governmental revenue necessary to provide public services. However, the “right” to deduct SALT payments on your federal income tax return are traditionally rooted in history and are very important to tens of millions of Americans. Rights once entitled are not easily surrendered up.
So, Trump and the GOP didn’t exactly “shut down” such SALT deductions. Not altogether. They left some wiggle room. Rather, the shut down the deduction, it was “capped,” i.e., limited. Taxpayers can no longer deduct unlimited amounts of SALT payments. The cap is $10,000 per year per taxpayer, meaning a taxpayer can deduct up to $10,000 per year in SALT payments.
On the face of it, this seems like an even handed compromise concerning a deduction not quite as apple pie as the charitable contribution deduction. Good politics and good policy. Right? Hmm, maybe not.
The $10,000 cap allows plenty of room for almost all Americans to continue deducting 100% of their SALT payments. Only that upper 1% of Americans pay more than $10,000 per year in SALT payments. Right? Nope!
In California and New York, two states with the highest state and local income tax systems and the highest property taxes because property values are generally the highest in the country, plenty of middle class Americans pay more than $10,000 per year in SALT impositions. The AVERAGE California taxpayer SALT payment is $18,000 per year! In contrast, most of Trump’s political base aren’t affected by this $10,000 cap at all.
Maybe the $10,000 cap is not as even handed then as it might appear at first blush. Now, consider this: New York and California, almost singularly the only states adversely impacted by the SALT cap, are traditional “blue” states; they vote Democratic and against Trump and the GOP that enacted the new tax bill. And the $10,000 SALT cap. Still think this cap is even handed? Not politically motivated and driven?
The Blowback
California and New York don’t think so. They’re plenty mad about this and not planning to take it lying down. Without a fight. California is gearing up to sue the federal government, in essence challenging the Constitutionality of the cap as a violation of the equal protection clause of the U.S. Constitution. On the one hand, no one is entitled to assurance that tax laws won’t be changed. On the other hand, all Americans are entitled to equal protection and treatment by the federal government. All Americans are equally entitled to the same $10,000 SALT deduction per year. Sounds equal. Until you look at the facts. Interesting to know whether anyone turns up some remark that The Donald may have made somewhere about how he’d show those blue states who are “disloyal” to HIM. Loose lips sink ships! The Donald’s lips are as loose as they come!
California has another thought in mind as well. California legislation has been introduced that would provide California taxpayers with a dollar for dollar credit against California SALT for every dollar contributed to a specific California agency long recognized under federal law as a charitable organization, meaning that the federal government historically permits contributions to that organization to be deducted under federal law.
The California strategy: California will use contributions to that California agency in exactly the same way as it now uses SALT revenue; California taxpayers will be permitted to pay that agency exactly what they now pays in SALT payments and will be able to use those “charitable” contributions as a SALT “credit” to zero out their SALT obligations. In other words, California taxpayers would now pay an amount exactly equal to its SALT obligation in lieu of the SALT obligation, but would be entitled to an uncapped charitable contribution deduction on its federal income tax return instead of a capped SALT deduction. For example, a California taxpayer with a present $15,000 SALT obligation who could only deduct $10,000 in SALT payments would, under the pending California legislation, be entitled to federally deduct the entire $15,000 payment as a charitable contribution deduction.
Will that fly? Is the PURPOSE underlying the payment to the California agency really charitable in spirit? Does that matter? Who knows?
And will Trump and the GOP simply amend the new tax bill to add a provision that says charitable contributions to an agency as a substitute for SALT payments will nevertheless be treated as SALT payments and not allowed to exceed the $10,000 SALT cap? And would that survive equal protection challenges?
Boggles the mind. Only the U.S. Supreme Court will likely decide all this. Will it “follow” the law or will it behave like just another political animal? Stay tuned.
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