IRS Stops Attempt To Bypass Trump Tax Law, MD Lawsuit Continues

MARYLAND — The Internal Revenue Service has announced final regulations that bar attempts by Maryland and other states to find ways to circumvent President Trump's tax reform law. The IRS said Tuesday that states cannot bypass a $10,000 cap on state and local tax (SALT) deductions imposed by the Republican tax law of 2017. That hurts taxpayers in high property tax states like Maryland.

The IRS effectively nullified legislation in New Jersey and several other states that allowed municipalities to establish charitable funds where taxpayers can donate in return for a property tax credit. The legislation was intended to protect taxpayers from a potential increase in the federal income tax as a result of the Trump Administration's cap on the state and local tax deduction (SALT).

The IRS didn't provide a specific reason for this week's decision other than saying: "The Treasury Department and the IRS continue to consider issuing future guidance on a number of issues raised by commenters."

Maryland has joined with Connecticut, New York, New Jersey in filing a lawsuit against the federal government seeking to strike down the cap. The lawsuit argues that the SALT cap was enacted to target Maryland and similar states, that it interferes with states’ rights to make fiscal decisions, and that it will disproportionately harm taxpayers in these states.

Attorney General Brian Frosh said last year tha more than 500,000 Marylanders will lose $6.5 billion in SALT deductions — an average of $11,800 per taxpayer.

“Eliminating the SALT deduction will jack up taxes for more than half a million Marylanders,”
Frosh said. “It is an attack on state sovereignty. It will reduce funding for local law enforcement and for construction of infrastructure statewide, and it will cripple our ability to educate our kids.”

The Trump administration has asked federal judges to toss out the attempt to invalidate the $10,000 cap on state and local tax deductions, calling it a "classically political" argument that isn't suited for a court, reported USA Today. In February 2019 court filings, the U.S. Department of Justice refuted claims from Maryland and the three other states, which said the cap infringed on their constitutional right to tax as they see fit.

The Justice Department argues Maryland hasn't suffered "concrete" and "imminent" harm from the cap, which means they would lack standing to sue. No decision has been issued to date.

The annual SALT cap runs through the end of 2025. States have offered workarounds, but the IRS has blocked most of them, including one involving charitable donations in exchange for credits on property tax payments, reports Accounting Today.

A New Jersey Congressman has introduced a bill, H.R. 1142, otherwise known as the "Stop the Attack on Local Taxpayers Act of 2019," which would remove the SALT cap.