The tax law changed significantly at the end of 2017, and by now we’ve had at least one tax year to consider and react to the new laws. We have previously written about some of the more important changes in the new tax law, e.g., pass-through deductions for S-Corps., LLCs and partnerships, and the increased standard deduction ($12,200 for single filers and married filers filing separately, $24,400 for married filers filing jointly). Contact us with any questions.
The following noteworthy events occurred in 2019 regarding the new laws:
Of significant concern to our clients in states such as New York, New Jersey and Connecticut, Congress put a limit on deductions for state and local taxes (“SALT”). Previously, these deductions were unlimited (although restricted under the Alternative Minimum Tax, AMT). Under the new law, taxpayers can only deduct up to $10,000 per tax return for SALT (i.e., a single filer has a $10,000 limit to the deduction, and a married couple filing jointly has the same $10,000 limit as the single filer).
We have been monitoring attempts to overcome this new law and preserve greater SALT deductions. Some local governments in 2018 attempted to convert local property taxes to charitable contributions which may then be deductible. The IRS in 2019 introduced regulations to bar such work-arounds. New York, New Jersey and Connecticut have sued to overturn the IRS rules, and the case is pending in federal court in the Southern District of New York.
In September 2019, a federal judge dismissed a lawsuit brought by New York, New Jersey, Connecticut and Maryland that challenged the $10,000 SALT deduction as a federal attempt to force local tax policies. The judge disagreed, stating that “the cap, again like every other feature of the federal Tax Code, is a part of the landscape of federal law within which states make their decisions as to how they will exercise their own sovereign tax powers.” For now, the SALT limitations are law.
The good news, however, is that the IRS stated that it would not challenge proper tax planning undertaken under the current tax law, once the law changes in 2025 (or earlier, such as following presidential and Congressional elections in 2020). “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025,” the IRS stated in a press release. This gives an opportune cover. Contact us now to explore estate tax planning while the opportunity exists and has been blessed by the IRS. This should give clients the security to engage in proper tax planning without fear of IRS audit.