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Don't Count on Maryland to Save You From the $10K State and Local Tax Deduction Cap

July 18, 2018

 

The state of Maryland, along with the states of New York, Connecticut, and New Jersey, has sued the U.S. government in federal court, seeking declaratory and injunctive relief to invalidate the $10,000 limit on state and local tax deductions that was enacted as part of Public Law 115-97, known as the Tax Cuts and Jobs Act (TCJA). Maryland alleges that resident will see a significant increase in their federal taxes as a result of the cap but will "receive the least benefit from" the TCJA, and thus the cap will cause "significant and irreparable direct harm" in the form of depressed home values for taxpayers and  and reduced revenues for the state. The state is asking the court to declare the cap on the state and local tax deduction unconstitutional and to issue an injunction barring its enforcement.

 

Maryland is seeking to limit the federal government's power to tax in favor of state's rights. The state's argument is essentially that the TCJA limits the options available to the state to raise funds by virtue of limiting the deductability of state and local taxes (income tax, property tax, and sales tax, to name the top three). Under the TCJA, individuals are allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes. Previously there was no limit, although the alternative minimum tax could effectively decrease the deduction's advantages at the higher income brackets for those with a lot of passive and investment income.

 

Federal courts have consistently upheld the ability of the federal government to tax income, and the SALT deduction limit is merely another way of raising income taxes. It is not clear that the state's rights argument will carry the day as any encroachment of the ability of the federal government to tax citizens will likely have unintended negative consequences. We would recommend that clients assume that the $10K SALT limit will stick in terms of tax planning.

 

Maryland argues in detail that this "new cap effectively eviscerates the SALT [state and local tax] deduction," noting that "Congress has included a deduction for all or a significant portion of state and local taxes in every tax statute since the enactment of the first federal income tax in 1861". The state further argues that "the SALT deduction is essential to prevent the federal tax power from interfering with the States' sovereign authority to make their own choices about whether and how much to invest in their own residents, businesses, infrastructure, and more"  and that the restriction on deductibility of state taxes violates the Tenth Amendment and "foundational principles of federalism" because it "deliberately seeks to compel certain States to reduce their public spending". Therefore, the cap on the deduction "cannot be reconciled with the limits on the federal government's tax powers under Article I, Section 8[,] and the Sixteenth Amendment".

 

Questions? Email as us at inquiry@njcpaccounting.com.

 

This  blog post was adapted from an article posted by the Journal of Accountancy.

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