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BY MICHAEL OLOHAN
OF NORTHERN VALLEY PRESS
New Jersey property taxpayers hoping to avoid paying more federal income tax this year under the 2017 GOP tax bill signed by President Donald Trump—that capped state and local tax deductions at $10,000—were dealt a blow by new Internal Revenue Service rules that prevent a proposed loophole.
The recent IRS ruling outlaws a charitable deduction workaround approved by Gov. Phil Murphy designed to let property taxpayers make payments that exceed the cap to a charitable foundation and receive equivalent deductions. The IRS ruling will be challenged by New Jersey and other states but may effectively stifle efforts to create municipal charitable trusts here.
Statewide, almost half of all taxpayers claimed a tax deduction above $10,000, with an average deduction of $17,850 in 2015. Most Northern Valley towns well exceed annual property taxes of $10,000.
On Aug. 23, the IRS issued draft rules voiding federal income tax donations for contributions to local charitable trusts that were recently set up by states—including New Jersey. Within hours, many state officials, including the governor, vowed to fight the ruling with complaints lodged during its public comment period, and legislative and legal efforts.
“The proposed rule would uphold the [SALT] deduction limitation by preventing attempts to convert tax payments into charitable contributions,” said U.S. Treasury Secretary Steven Mnuchin in a statement Aug. 23.
Gov. Murphy signed a law in May that allowed towns, counties and school districts to set up charitable trusts to accept donations in place of property taxes. Initially, the law permitted donations to be eligible for up to a 90 percent tax credit for charitable donations.
However, in late May, the IRS said it would issue new rules addressing tax deductibility for charitable deductions, throwing the tax workaround plan into disarray.
“It’s an extraordinary politicization of a regulatory process,” Murphy said Aug. 24, reacting to the new IRS ruling. “We’re sick of sending a boatload of money down and getting very little back. And this [$10,000 cap on federal deductions] only exacerbates an already existing condition,” he added.
U.S. Rep. Josh Gottheimer, (D-NJ-5), who proposed the tax law workaround signed May 4 by Murphy, said the IRS ruling “without any congressional authorization whatsoever, just jacked up taxes today on millions of Americans. We will fight these shameless rules and will continue to fight for lower taxes for New Jersey families.”
‘More people, businesses to flee’
“Treasury’s arbitrary fiat will encourage more people and businesses to flee New Jersey and leave every other resident of our state holding the bag,” Gottheimer said in an Aug. 23 statement.
State taxpayers reportedly sent $31 billion more in taxes in 2015 to the federal government than they received in return, according to a SUNY survey—more than any other state except New York.
State Attorney General Gurbir Grewal, the state’s top law enforcement officer, reacted to the ruling by noting “we’re ready and willing to fight back.”
“For years, the IRS has allowed taxpayers to receive credits for donations they made to state and local governments and nonprofits. And that is a good thing because these programs encourage taxpayers to give money to natural resource preservation, hospitals, financial aid, schools, domestic violence victims, and more,” said Grewal.
“Today’s proposal undermines all that. There doesn’t appear to be any good basis for the sudden change in policy except to make it more difficult for states like New Jersey to cope with the backward tax policies the federal government imposed on us last year,” Grewal said.
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‘Sticking it to the blue states’
Grewal said the new IRS ruling “is so focused on sticking it to the blue states that they’re willing to stick it to the red states, too.”
“That hurts everyone, especially those who donate to charity,” said Grewal.
In mid-July, New Jersey joined Connecticut, New York and Maryland in filing suit “to prevent the federal government from enforcing the SALT deduction cap, and to have the cap declared invalid.”
That lawsuit states “a state and local tax [SALT] deduction on individual tax liability has historically been recognized by Congress as essential under the Constitution” and notes a SALT cap “significantly increases” New Jersey residents’ tax liability. The suit claims the SALT changes are illegal because of federal coercion as well as constitutional concerns.
‘Extremely unfortunate’
Tenafly Mayor Peter Rustin called the IRS ruling “extremely unfortunate” and said efforts to overturn the IRS decision “could possibly be politically motivated.
“I’m surprised that he [Grewal] is getting involved in this,” said Rustin.
Rustin said when he first heard about the federal limit on state and local tax deductions he surmised “it was payback for all the people who didn’t vote for him [President Trump].”
Rustin said the cap on SALT deductions may affect real estate sales in towns where municipal taxes are over $10,000, including Tenafly.
“It’s a good example of a government action loaded with unintended consequences,” said Rustin, adding some corporate tax deductions in the new federal tax law “are being made up on the backs of property owners.”
Alpine Mayor Paul Tomasko said that while efforts to save the federal tax deduction are appreciated, the need to set up a charitable trust to accept taxpayers’ donations would come “with administrative challenges” itself and likely local costs.
‘Somewhat of a long shot’
“It was somewhat of a long shot and there was a fair share of skepticism expressed about this from the onset,” Tomasko said.
Tomasko said saving taxpayer dollars has been a top priority in Alpine and other Northern Valley communities who have shared services for decades.
Tomasko said starting with police dispatch services, which later became centralized at the county Public Safety Operations Center in Mahwah, and ambulance services, compost facilities and recreational fields, local officials constantly look for ways to reduce costs.
Old Tappan Mayor John Kramer said with the IRS ruling against charitable trusts, he was not sure how to help local taxpayers but was glad to see state officials taking charge.
“I see no way around it,” he said of the proposed IRS regulations to void New Jersey’s SALT limit workaround. “But any help that the governor and state AG can give us would certainly be welcome.”
While the Aug. 23 IRS ruling faced intense criticism and state lawsuits—and more uncertainty moving forward—most local mayors and officials previously expressed criticisms of President Trump’s Tax Cut and Jobs Act, which was approved Dec. 22 and effective Jan. 1.
Hoping to avoid the new SALT deduction limits, thousands of taxpayers formed long lines in northeast Bergen County tax collectors’ offices in late 2017 to prepay 2018 taxes by year end to try to deduct their full amount of local taxes.
In many Northern Valley towns, annual taxes average between $15,000 to $25,000. The IRS ruled previously that only “billed” 2018 quarterly tax payments were deductible and has not yet revised that ruling through it did say in February that decision would be reviewed.
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