IRS Sticks It To High Tax States - By Kelly J. Bullis, CPA
Updated: Feb 13
There are only a very few times that I find myself cheering for the IRS. This happens to be one of them.
Let me explain why one of the new tax provisions in the 2018 Trump Tax Law is so great. Before 2018, Federal Taxpayers who reside in Nevada were being forced to subsidize the wasteful spending habits of states like New Jersey.
Prior to 2018, if a Nevada resident had $100,000 of taxable income, their Federal Income Tax would be $16,471. But, if that person lived in New Jersey, having about $14,000 less Federal Taxable Income (due to State Income Tax and High Property Taxes), they would only be paying $12,971 in Federal Income Taxes! That means Nevadans were paying 22% more of the Federal Tax Receipts than New Jersey residents. I realize those poor suckers in New Jersey are being taxed to death by their state, but why should Nevadans bare a higher burden of the cost of the Federal Government? Do folks in New Jersey not get the same benefits of common defense, etc. from the Federal Government?
The new Trump Tax Law limits the itemized deduction for total state taxes to $10,000. That means that in that same scenario, the New Jersey folks have to pay more Federal Income Tax. They still pay a little less than Nevadans, but the difference is now only 7% less instead of 22%. As a Nevadan, I like that much better!
So why am I happy with the IRS? Because states like New Jersey came up with a dumb idea to try and get around the $10,000 cap. They created a program where taxpayers in New Jersey could “donate” money to a state run charity and receive a 70% credit against their state taxes. This way, they get to deduct more charity donations and in effect, still get a high deduction for all the taxes they pay in their state.
Nice try New Jersey, New York, Massachusetts, Illinois, California, etc.!!!! Very creative. Only one problem. There has ALWAYS been a rule about charitable contributions, that you only get to deduct something to the extent you don’t get anything in return. Thus, if you “give” your state charity $1,000 and get a $700 credit against your state income tax, you only get a $300 charity deduction on your Federal Income Tax Return. Those states knew this, but went ahead with their plans anyway.
That’s where the IRS said, “Enough!” They just issued proposed IRS Regulation 2018-172. This new regulation specifically says, “…a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.”
Now, aren’t you happy with the IRS too? (Of course, if you live in New Jersey, maybe you’re not.)
Did you hear? Prov 11:1 says, “A false balance is an abomination to the LORD, but a just weight is his delight.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.