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IRS to Propose Rules on Transfers Made to Avoid New Limit on SALT Deductions

The IRS has announced that it intends to issue proposed regulations regarding the federal tax treatment of payments made by individuals to funds controlled by state and local governments in exchange for credit against state and local taxes (SALT). Some state legislatures have adopted or are considering such proposals as means to get around the limitation on the itemized deduction of state and local taxes after 2017. The aim of the legislation is to allow individuals to characterize any transfers as charitable contributions deductible for federal income tax purposes.

The proposed regulations to be issued by the IRS, however, will make clear that federal law governs the tax treatment of such transfers for federal income tax purposes, including substance-over-form principles. The regulations will discuss the relationship of the charitable contribution deduction and the new limit on SALT deductions for federal tax purposes.

IRS Notice 2018-54 says “The proposed regulations to be issued by the IRS, however, will make clear that federal law governs the tax treatment of such transfers for federal income tax purposes, including substance-over-form principles. THE regulations will discuss the relationship of the charitable contribution deduction and the new limit on SALT deductions for federal tax purposes. ”