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States Trying to Circumvent Federal Property Tax Changes

United States Capitol Tax ReformWhile the long-term effects of the recently passed Tax Cuts and Jobs Act remain to be seen, one of the more controversial changes in the law involves caps on interest payment deductions and property tax deductions. Prior to the tax reform bill, homeowners could deduct interest payments on home loans worth up to $1 million. The Tax Cuts and Jobs Act decreases that to $750,000, as well as capping annual property tax deductions at $10,000, when there was no cap on this previously. Now some affected states are looking for ways to minimize or eliminate the financial penalties the tax law would impose on homeowners with high property values.

As reported by USA Today in January, the states of New York, New Jersey, and Connecticut actually formed a coalition to sue the federal government over the tax changes. Whether that works or not, in the meantime Forbes reports that several states are coming up with plans to allow homeowners to work around the new caps and reduce their resulting tax burden under the new law.

So what do these plans look like? In Connecticut, Gov. Dannel P. Malloy has put forward a proposal that would allow cities and towns within the state to create state-owned charitable organizations that taxpayers could donate into, after which they would receive an equivalent tax credit. So, as Forbes explains, “...in theory, a homeowner with a $12,000 tax bill could instead donate $12,000 to their town’s charity and end up owning nothing in taxes.”

New York’s Gov. Andrew Cuomo has put forward a similar plan, which would allow New Yorkers donating to the proposed state-owned charities to get an 85 percent tax credit back on their strategic donations. However, Cuomo also proposes instituting a voluntary payroll tax in which participating employers would pay a 5 percent tax annually on employee payroll expenses above $40,000 a year. Those employees would then receive state income tax credits that would reduce their federal tax liability, in theory.

Could these plans work? U.S. Treasury Secretary Steven Mnuchin has called the idea “ridiculous.” Time will tell who is right.

About Author: David Wharton


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