The Treasury Department moved yesterday to block states from circumventing new federal limits on state and local tax deductions, the New York Times reported. A proposed Treasury Department rule, certain to face legal challenges from several states, would limit the type of charitable contributions that Americans are allowed to deduct on their federal taxes. The rule would effectively exclude donations that are rewarded with state tax credits. The regulation would affect only taxpayers who currently deduct more than $10,000 in state and local taxes. And its effect would most likely be concentrated among high earners in high-tax states, some of which created credits to help residents reduce the federal take. But it could also adversely affect taxpayers in other states, where such credits were already being given for contributions made to certain private or charter schools and universities, land donated for conservation purposes and donations to housing assistance programs. The proposed rule involves a provision of the new Republican tax law that set a $10,000-a-year cap on deductions for state and local taxes. The cap helped Republicans keep the estimated cost of the tax law, which centers on a sharp reduction in the corporate tax rate, under $1.5 trillion, to comply with a budget procedure that allowed the bill to pass without the support of any Democrats. Angered by the move, New York and New Jersey passed laws that set up charitable funds for state services, such as schools, and awarded state tax credits based on donations to those funds. Taxpayers making the donations would reduce their state taxes by the amount of the credit, but the state’s revenue would not fall.
