State Issues New Rules on SALT Workaround And Gives Warning About IRS

Attorney General says he will fight IRS in court if need be, as Murphy administration looks to help residents avoid hefty tax hikes because of federal cap on deductions

Credit: Office of Attorney General/Tim Larsen
State Attorney General Gurbir Grewal
Gov. Phil Murphy’s administration issued new regulations yesterday to help New Jersey residents avoid hefty tax hikes in the wake of the new federal tax policy that caps the longstanding SALT deduction for state and local taxes.

The latest move by the governor comes even after a recent Internal Revenue Service notice raised serious concerns about the legality of the state’s so-called workaround.

It will now be up to New Jersey’s local-government leaders and individual taxpayers to decide whether to take on the risk of defying the IRS — the state’s own notice includes potentially confidence-shaking disclaimers that warn residents about the federal government’s ongoing concerns.

“The Division of Local Government Services makes no representations with respect to how the IRS will treat property tax creditable-contributions to a charitable fund,” the notice said.

State Attorney General Gurbir Grewal, who is already suing to overturn the $10,000 cap on the SALT deduction that President Donald Trump signed into law late last year, also signaled yesterday that he’s ready to file another lawsuit if the IRS attempts to block the effectiveness of New Jersey’s workaround.

Grewal to IRS: See you in court

“If and when the IRS finalizes its rules, we’ll see them in court,” Grewal said.

Among the many changes included in a 2017 federal tax-code overhaul was a lowering of individual income-tax rates and a significant reduction of the federal tax burden for corporations and those with large estates.

While several analyses show many New Jersey residents will get some modest tax relief thanks to those changes and others that came out of the Republican Congress, many others who itemize their deductions are now in line to see a hefty tax increase, largely due to the $10,000 cap on the SALT deduction, which had previously been unlimited. That’s because the average annual property-tax bill in New Jersey is nearly $8,700 and the per capita state income-tax burden for New Jersey residents totals nearly $1,500.

In fact, according to the latest IRS data, the average New Jersey taxpayer who used the SALT deduction during the 2016 tax year was able to write off more than $10,000 in 20 out of the state’s 21 counties. The deduction was worth as much as $24,783 on average for those who took it in Bergen County in 2016, and as little as $9,012 in Cumberland County — the only place in the state where the average SALT deduction did not exceed the $10,000 limit. The overall statewide average was $18,092.

In addition to filing a federal lawsuit to nullify the SALT cap, Murphy also enacted legislation in May to create the workaround, which is largely based on the full deductibility for charitable contributions that the federal tax code allows. Under the workaround, local governments can create charitable organizations to collect donations from residents to fund services — like education and law enforcement — that traditionally are paid for using property taxes.

Oliver: It’s a ‘win-win’

The workaround allows the local governments, including municipalities, counties and school boards, to offer tax credits worth up to 90 percent to residents who donate to the new civic groups; the tax credits would offset their property-tax liabilities. But the law isn’t mandatory, meaning no local governments or residents will be forced to participate if they don’t want to.

The regulations released by the Department of Community Affairs yesterday spell out which services would qualify for funding out of the proposed charitable organizations; they list capital projects, code enforcement, open-space preservation, public safety, public works and recreation among those services. The Murphy administration also provided a model ordinance and resolution that municipal and county governments can pass to make sure the charitable organizations can be established before the end of the year.

“This new tax credit makes sense and is a win-win for property taxpayers and New Jersey local governments,” said Lt. Gov. Sheila Oliver, who also serves as commissioner of the DCA.

The workaround issue has been a good one politically for Democrat Murphy — especially as New Jersey’s GOP congressmen are in tough re-election contests throughout the state this year. But the notice issued last month by the IRS suggested the administration’s 90 percent tax-credit wouldn’t pass muster under IRS rules. Instead, it said “no more than 15 percent of the payment amount” would be allowed to be deducted.

In response to that language in the proposed IRS rules, the new state regulations give residents the choice of taking a 15-percent credit to not run afoul of the IRS instead of using the full 90 percent allowed by the state law.

Expectations have been tempered

Michael Cerra, assistant executive director of the New Jersey State League of Municipalities, said yesterday that the IRS notice on the workarounds has “tempered expectations” among local leaders who had been awaiting the state’s regulations.

“You probably will see a few (towns) pursue this,” Cerra said. “I think the majority are probably going to take a step back.”

The state’s own Local Finance notice also includes a warning that may give residents pause, especially as playing it safe by reducing the credit to 15 percent could take away the effectiveness of the workaround for many of those who would likely consider using it to save money.

“The municipality or county shall not make any representations to a donor or prospective donor concerning how the Internal Revenue Service (IRS) may treat donations made to a charitable fund,” the state notice said. “Donors must also sign a statement acknowledging that the municipality or county makes no such representations concerning how the IRS may treat donations made to a charitable fund.”