Includes reporting by Jonathan Stempel, Reuters
As reported by Reuters, four U.S. states sued the federal government on Tuesday to void the new $10,000 cap on the federal deduction for state and local taxes (the SALT deduction), included as part of the 2017 Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017).
Background—deductions for state and local taxes. For tax years beginning after 2017 and before 2026, the TCJA amended Code Sec. 164(b)(6) to limit individual annual SALT deductions, which had previously been unlimited, to a maximum of $10,000, with no carryover for taxes paid in excess of that amount. The SALT deduction limit doesn’t apply to taxes paid in connection with a trade or business or in connection with the production of income. (Code Sec. 164(b)(6))
As a result of this change, many taxpayers will not get a full federal income tax deduction for their payments of state and local taxes.
States’ response. Almost immediately after the TCJA’s passage, certain state legislatures—specifically, those of high-tax states—began looking for ways to mitigate the effect of the new Code Sec. 164(b)(6) SALT deduction limit for their residents, including a planned lawsuit to challenge the limit (see below) and workarounds that effectively aim to convert taxes subject to the cap into deductible charitable contributions. (For more details, see “IRS to issue regs on workarounds adopted by states to avoid limit on State and local tax deduction” (5/24/2018).)
New lawsuit. On Tuesday, July 17, four states—New York, Connecticut, Maryland and New Jersey—sued the federal government to void the $10,000 SALT deduction cap.
The states asserted the cap unconstitutionally intrudes on state sovereignty and that it will depress home prices, spending, job growth and economic growth, and impede their ability to pay for essential services such as schools, hospitals, police, and road and bridge construction and maintenance.