IRS announces proposed regulations on SALT deduction cap

May 24, 2018
May 24, 2018
0 min. read

On May 23, 2018, the IRS released Notice 2018-54, announcing that Treasury and the IRS intend to propose regulations addressing the federal income tax treatment of certain payments made by taxpayers for which taxpayers receive a credit against their state and local taxes.

The notice

Section 11042 of Pub. L. No. 115-97 (commonly referred to as the “Tax Cuts and Jobs Act” or “TCJA”), limits an individual’s deduction under section 164 for the aggregate amount of state and local taxes paid during the calendar year to $10,000 (or $5,000 for those married filing separately). The new limit applies to taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2026.

The IRS states in Notice 2018-54 that state efforts to circumvent the new statutory limitation on state and local tax deductions may not be effective for federal income tax purposes. The Notice specifically discusses programs designed by states to allow taxpayers to make transfers to the state or its designated transferees in exchange for credits against the state or local taxes that the taxpayer is required to pay. These proposals aim to allow taxpayers to characterize the transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

The Notice states that IRS and Treasury intend to propose regulations addressing the federal income tax treatment of such transfers, and that the regulations will emphasize that substance-over-form principles will govern the federal income tax treatment of such transfers. Thus, while these programs may appear to provide relief from the new limit, the IRS likely will not allow taxpayers to avail themselves of these technical loopholes.


The federal state and local tax (SALT) deduction has existed in some variation for over 100 years, and at least since the federal income tax was enacted. The deduction allows those taxpayers who itemize their taxes to deduct state and local income taxes and property taxes from their federal taxable income. Taxpayers may also choose to deduct sales taxes instead of income taxes, but may not deduct both income and sales taxes.

In recent years, the SALT deduction has received some criticism for benefiting those with higher incomes residing in high-tax states, such as California, Illinois, New Jersey, and New York. It is estimated that taxpayers residing in only a handful of states receive well over half of the deduction. According to the 2015 IRS individual income tax return statistics, the largest single itemized deduction was for state and local taxes, accounting for over 40 percent of the total amount of all itemized deductions. In short, the SALT deduction has historically been one of the most popular deductions.  

In response to the limitation imposed by the TCJA, a number of states proposed so-called “workarounds” to help ease the impact of the limitation on taxpayers subject to more than $10,000 of state and local income taxes. California, Illinois, Rhode Island and Washington are some of the states that proposed state charitable funds that would offer one-to-one state income tax credits in exchange for donations. New York and Connecticut recently enacted workarounds, including a payroll tax and an 85 percent income tax credit in New York and a pass-through entity tax in Connecticut – intended to help ease the burden on high income taxpayers.

How the proposed regulations may impact these new workarounds, and proposed workarounds currently under consideration in state legislatures, remains to be seen.


Taxpayers are urged to use caution and consult their tax adviser before using these programs to exceed the $10,000 limit.

For more information on the TCJA, please visit RSM’s Tax Reform Resource Center for the latest analysis on this and other tax reform developments. 

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