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Four workarounds on SALT Deduction Limits proposed in the light of IRS




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Proposed regulations issued only to frontier states circumventing the new tax laws

The Tax and Employment Act 201

7 (" Act ") emagazine.credit-suisse.com/app/art … = 157 & lang = DE One of the most discussed changes is the imposition of stringent restrictions on deductible state and local taxes ("SALT") that are now on The IRS Regulation restricts contributions rather than state tax payments to avoid SALT restrictions, but options remain in place The most affected high tax countries have tried several tactics to circumvent these rules These tactics provide means to make charitable donations to state-created charities, rather than paying certain state income tax n (carried out by receiving a state income tax credit based on the qualifying donation) were tapped in new proposed regulations. That was as expected, so the new Regs (the gentle nickname for Regulatio ns) was no surprise. But there are still many interesting points to discuss about these new regs, some other planning options, and insights into what the act actually did.

What's going on? ?

Very! Footnote 1 of the proposed rules states: "The Joint Committee on Taxes estimated that limiting state and local tax deductions, together with certain other single deductions, would increase $ 668 billion in ten years." The IRS must be tough as the SALT The limit pays off for many of the tax cuts that marked the 2017 law. If the high tax blue states could facilitate a run around the new restrictions, the revenue projections for the law would implode (and many are not particularly optimistic that these estimates are in any case realistic).

For taxpayers, few will really be affected by the proposed rules. The proposed regulations provide the statistical data to demonstrate this. "Following the adoption of the bill, which significantly increases the standard deduction, it is estimated that ninety percent of taxpayers do not claim individual deductions of any kind … It is estimated that about five percent of taxpayers will perform, but not have and will have local income tax deductions the SALT ceiling. "Thus, only about 5% of taxpayers will have their state income tax deduction limited by the new rules. Many of those who do not list will, as promised, actually be able to file postcard-type income tax returns.

But for these 5% of taxpayers affected by the SALT restriction, they will often feel the pain hard. Because the workaround has generally been resolved, other planning techniques are mentioned at the end of this article. But let's first see the new rules, the limitation and what the regs do.

How the SALT Work Around Could Have Worked

The idea was, in general, that if you donated to certain charities, you can qualify for a charitable contribution deduction in your federal tax return. Since charitable donations are not capped, this could be a workaround for the SALT limit. You could not deduct your state tax payment, but you could deduct a contribution you made to a charity instead of paying a state income tax. Control alchemy! If you could deduct the full "donation" without limitation on your federal tax return, you would have bypassed the new SALT restrictions, in contrast to the state tax limit, which would have been limited. To encourage the workaround and help its citizens disadvantaged by the new law, some states took steps to provide taxpayers donating to certain charities with a tax credit on their state income tax return on these donations. Abracadabra … until the new reg.

What the proposed regs do

If alchemy were allowed to turn a non-deductible state tax into a deductible donation, the revenue estimates of the law would certainly have failed. So the Ministry of Finance had to act. If a taxpayer makes a payment or transfers assets to a government charitable organization or uses them for a government charitable organization (which is listed in Section 170 (c) of the Code), the amount of the tax deduction for charitable purposes in accordance with Art. The new provisions reduced by the amount of a government or local tax credit that the taxpayer receives or intends to receive in return for the payment or transfer of the taxpayer.

Here is an example from the new regulations: "A, an individual pays a $ 1,000 payment to X, to companies listed in Section 170 (c) In return for the payment, A receives or expects a state tax credit equal to 70% of the amount of A's payment to X. Under paragraph (h) (3) (i) of this section, A's contribution deduction is reduced to $ 700 (70% x $ 1,000) Reduction will be made regardless of whether A can claim the state tax credit this year, so A's contribution to charity can not exceed $ 1,000 for X $ 300. "

In most cases, this change eliminates the Tax advantage of this type of planning.

FLASH – Act Quickly (Maybe)

New regulations will not come into effect until August 27, 2018 Daring taxpayers living in tax havens who have a charitable fund program may now choose to donate to apply for tax credits . The proposed regulations, however, give rise to fears regarding this tactic.

The changes to these regulations are expected to apply for contributions after August 27, 2018. Could the date of entry into force provide a gossamer window of donation planning before 27 August? Perhaps not given the discussion in the preamble to the regulations that the consideration rules are based on long-standing case law and regulations. What this means is that if you make a quick contribution and get a tax credit, the IRS can audit your return and apply existing (old) legal principles to ban much or all of these deductions.

But this conclusion is not certain, so you might want to pay fast. This is because the regulation recognizes that "prior to this proposed rule, there were no relevant regulatory guidelines for the treatment of government or local tax credits from charitable contributions to the companies listed in Section 170 (c) and there were no guidelines beyond that Note 2018 -54, which dealt with the interaction between Section 170 and the newly-enacted SALT cap, and there was some uncertainty among taxpayers as to whether government and municipal tax credits are a return that reduces a taxpayer's tax deduction. " suggests that the previous law may not have been so clear, but there are different options. There may have been only a lack of certainty about the compensation, d. H. The amount of consideration for a donation that you receive for the state tax credit that you can receive. This could really relate to the determination of the countervalue or offset. In other words, the preamble to the regulations makes it clear that reducing a donation to reflect a consideration was clear from the previous law, but not the amount. The proposed regulations concern the determination of the amount under the most common circumstances (and that will probably be the amount of the loan). Another interpretation is that the existence of a counter-approach to state tax credits can not be clear. You need to determine if this is a risk that you would like to take.

Other planning steps to address SALT restrictions if the charity workaround does not work

Now that the donation bypass has been nailed instead of bypassing the state taxes What else could you do if you're a five percent center, that is affected by the new SALT restrictions? Here are a few ways to consider

  • Move to a low tax status. Taxpayers have done this for decades and with the greater pain that the law has created for paying high state taxes. The problem with this solution for many is that those who are most affected are doctors, lawyers, accountants, brokers, etc., who do not qualify for the pass-through entity's 20% deduction and lose large state tax deductions. Licensed professionals can not move easily.
  • Create at least one non-Grantor trust, maybe more (but there are also suggestions for that!) And move your residency and wealth tax payments to a trust that receives its own $ 10,000 SALT limit.
  • Create Non-Grantor Trusts in non-tax jurisdictions and relocate your non-annuity portfolio assets out of your high-tax state and avoid at least state income taxes.

Conclusion

The law made havoc of traditional tax planning. More precisely than reducing the tax burden, the law shifted the tax burden. Those living in tax havens who can not benefit from other tax breaks are subject to the law, which bears a large part of the cost of the alleged tax cuts. But as the above 5% statistic confirms, those who get nailed are not a big ballot in terms of number like those who get a little tax relief and postcard size tax return. The Ministry of Finance and the IRS have adopted a strategy to circumvent the unfairness of the new SALT restrictions, but other planning options remain. If all that is clear in 2026, it may be that the new rules will be forgotten.

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Proposed regulations issued only to border states circumventing the new tax laws

The 2017 Tax and Employment Act ("Law") has dramatically changed many aspects of the tax system. One of the most discussed changes is the imposition of stringent government and local tax deduction ("SALT") restrictions, which are now capped at $ 10,000. The IRS Regulation restricts contributions instead of state taxation to avoid SALT restrictions, but options remain The most affected high tax states have tried several tactics to circumvent these rules. One of these tactics of providing funds to make charitable contributions to government-created charities, rather than paying certain state income taxes (carried out by receiving a state income tax credit based on the qualifying donation), has been clamped down in new proposed regulations. This was as expected, so the new Regs (the affectionate nickname for Regulations) was no surprise. But there are still many interesting points to discuss about these new regs, some other planning options, and insights into what the act actually did.

What's going on? ?

Very! Footnote 1 of the proposed rules states: "The Joint Committee on Taxes estimated that limiting state and local tax deductions, together with certain other single deductions, would increase $ 668 billion in ten years." The IRS must be tough as the SALT The limit pays off for many of the tax cuts that marked the 2017 law. If the high tax blue states could facilitate a run around the new restrictions, the revenue projections for the law would implode (and many are not particularly optimistic that these estimates are in any case realistic).

For taxpayers, few will really be affected by the proposed rules. The proposed regulations provide the statistical data to demonstrate this. "Following the adoption of the bill, which significantly increases the standard deduction, it is estimated that ninety percent of taxpayers do not claim individual deductions of any kind … It is estimated that about five percent of taxpayers will perform, but not have and will have local income tax deductions the SALT ceiling. "Thus, only about 5% of taxpayers will have their state income tax deduction limited by the new rules. Many of those who do not list will, as promised, actually be able to file postcard-type income tax returns.

But for these 5% of taxpayers affected by the SALT restriction, they will often find the pain severe. Because the workaround has generally been resolved, other planning techniques are mentioned at the end of this article. But let's first see the new rules, the limitation and what the regs do.

How the SALT Work Around Could Have Worked

The idea was, in general, that if you donated to certain charities, you can qualify for a charitable contribution deduction in your federal tax return. Since charitable donations are not capped, this could be a workaround for the SALT limit. You could not deduct your state tax payment, but you could deduct a contribution you made to a charity instead of paying a state income tax. Control alchemy! If you could deduct the full "donation" without limitation on your federal tax return, you would have bypassed the new SALT restrictions, in contrast to the state tax limit, which would have been limited. To encourage the workaround and help its citizens disadvantaged by the new law, some states took steps to provide taxpayers donating to certain charities with a tax credit on their state income tax return on these donations. Abracadabra … until the new reg.

What the proposed regs do

If the alchemy were allowed to convert a non-deductible state tax into a deductible donation, the revenue estimates of the law would certainly have occurred failed. So the Ministry of Finance had to act. If a taxpayer makes a payment or transfers assets to a government charitable organization or uses them for a government charitable organization (which is listed in Section 170 (c) of the Code), the amount of the tax deduction for charitable purposes in accordance with Art. The new provisions reduced by the amount of a government or local tax credit that the taxpayer receives or intends to receive in return for the payment or transfer of the taxpayer.

Here is an example from the new regulations: "A, an individual pays a $ 1,000 payment to X, to companies listed in Section 170 (c) In return for the payment, A receives or expects a state tax credit equal to 70% of the amount of A's payment to X. Under paragraph (h) (3) (i) of this section, A's contribution deduction is reduced to $ 700 (70% x $ 1,000) Reduction will be made regardless of whether A can claim the state tax credit this year, so A's contribution to charity can not exceed $ 1,000 for X $ 300. "

In most cases, this change eliminates the Tax advantage of this type of planning.

FLASH – Act Quickly (Maybe)

New regulations will not come into effect until August 27, 2018, so daring taxpayers living in tax havens with a charity loan program could now make donations to make their tax credits . The proposed regulations, however, give rise to fears regarding this tactic.

The changes to these regulations are expected to apply for contributions after August 27, 2018. Could the date of entry into force provide a gossamer window of donation planning before 27 August? Perhaps not given the discussion in the preamble to the regulations that the consideration rules are based on long-standing case law and regulations. What this means is that if you make a quick contribution and get a tax credit, the IRS can audit your return and apply existing (old) legal principles to ban much or all of these deductions.

But this conclusion is not certain, so you might want to pay fast. This is because the regulation recognizes that "prior to this proposed rule, there were no relevant regulatory guidelines for the treatment of government or local tax credits from charitable contributions to the companies listed in Section 170 (c) and there were no guidelines beyond that Note 2018 -54, which dealt with the interaction between Section 170 and the newly-enacted SALT cap, and there was some uncertainty among taxpayers as to whether government and municipal tax credits are a return that reduces a taxpayer's tax deduction. " suggests that the previous law may not have been so clear, but there are different options. There may have been only a lack of certainty about the compensation, d. H. The amount of consideration for a donation that you receive for the state tax credit that you can receive. This could really relate to the determination of the countervalue or offset. In other words, the preamble to the regulations makes it clear that reducing a donation to reflect a consideration was clear from the previous law, but not the amount. The proposed regulations concern the determination of the amount under the most common circumstances (and that will probably be the amount of the loan). Another interpretation is that the existence of a counter-approach to state tax credits can not be clear. You need to determine if this is a risk that you would like to take.

Other planning steps to address SALT restrictions if the charity workaround does not work

Now that the donation bypass has been nailed instead of bypassing the state taxes What else could you do if you're a five percent center, that is affected by the new SALT restrictions? Here are a few ways to consider

  • Move to a low tax status. Taxpayers have done this for decades and with the greater pain that the law has created for paying high state taxes. The problem with this solution for many is that those who are most affected are doctors, lawyers, accountants, brokers, etc., who do not qualify for the pass-through entity's 20% deduction and lose large state tax deductions. Licensed professionals can not move easily.
  • Create at least one non-Grantor trust, maybe more (but there are also suggestions for that!) And move your residency and wealth tax payments to a trust that receives its own $ 10,000 SALT limit.
  • Create Non-Grantor Trusts in non-tax jurisdictions and relocate your non-annuity portfolio assets out of your high-tax state and avoid at least state income taxes.

Conclusion

The law made havoc of traditional tax planning. More precisely than reducing the tax burden, the law shifted the tax burden. Those living in tax havens who can not benefit from other tax breaks are subject to the law, which bears a large part of the cost of the alleged tax cuts. But as the above 5% statistic confirms, those who get nailed are not a big ballot in terms of number like those who get a little tax relief and postcard size tax return. The Ministry of Finance and the IRS have adopted a strategy to circumvent the unfairness of the new SALT restrictions, but other planning options remain. By the time all this was sorted out in 2026, these new rules may be forgotten.


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