House Democrats push Treasury, IRS for repeal of rule blocking state and local taxes cap workaround

Three House Democrats are still pushing for relief on the $10,000 limit on the federal deduction for state and local taxes, known as SALT. 

Reps. Josh Gottheimer, D-N.J.; Tom Suozzi, D-N.Y.; and Mikie Sherrill, D-N.J., on Friday sent a joint letter to U.S. Department of the Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, pleading to reverse a 2019 rule blocking a state-level SALT relief workaround.

Enacted by the Tax Cuts and Jobs Act of 2017, the SALT cap spurred legislation in Connecticut, New Jersey and New York that allowed residents to bypass the limit. These state-level laws permitted local charitable funds offering property tax credits to homeowners who contributed.

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However, the Treasury and the IRS blocked this strategy in 2019, saying the receipt of a SALT credit in return for charitable donations would constitute a “quid pro quo.”

“As Americans struggle with rising costs and sustained economic turmoil caused by the Covid-19 pandemic, we encourage you to take immediate action to support nonprofit charities,” the lawmakers wrote.

“Thirty-three states offer tax credits that encourage charitable giving to certain causes, and this rule unnecessarily restricts the ability of states to incentivize charitable donations to nonprofits,” they said.

The letter comes after five House Democrats, including Gottheimer, Sherrill and Suozzi, asked the House Appropriations Subcommittee on Financial Services and General Government to deny IRS funds to stop state-level SALT cap workarounds.

Given Democrats’ slim House majority, the SALT limit was a sticking point in Build Back Better negotiations. Although House Democrats in November passed an $80,000 SALT cap through 2030 as part of their spending package, Sen. Joe Manchin, D-W.Va., halted the plan in the Senate.