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t has been two years since the IRS the standard deduction, would decrease
Istated in Notice 2020-75 that it the number of individual income taxpay- Uncertainty surrounds
ers claiming itemized deductions from
intended to issue regulations regarding
46.5 million in 2017 to just over 18 whether an SITP must
the deductibility of certain state and
million in 2018 — resulting in 88% of be paid by year end
local income tax payments imposed on
households filing tax returns using the
passthrough entities (PTEs). However, increased standard deduction. The fed- or merely accrued for
2
a PTE to receive a
as of this writing, no such regulations eral government would receive a double
have been issued. Tax practitioners benefit: additional revenue and simpli- federal deduction.
fied tax returns to review under audit.
have gone through another tax season
However, some states were unsup-
without substantive guidance answer-
portive of the limitation for fear it would In addition to the lawsuit, repre-
ing critical questions regarding the
decrease the ability to collect state and sentatives from these states pushed for
interaction between PTE taxes and local income taxes. States with residents legislation to increase the SALT cap,
numerous federal tax provisions. In the receiving the most value for the SALT with one such provision included in the
absence of IRS regulations, tax practi- deduction prior to the federal limita- House of Representatives’ Build Back
5
tion included California, Connecticut, Better Act passed by that chamber in
tioners are responsible for formulating
3
Maryland, New Jersey, and New York. November 2021. The proposal would
positions that Notice 2020-75 did not
These states were also the most active in have increased the SALT cap from
provide.
trying to identify a workaround to allow $10,000 to $80,000; however, contro-
their residents to receive a full federal versy soon arose that the proposed plan
Background SALT deduction. would benefit only high-income house-
One of the most significant tax changes New York, joined by Connecticut, holds. Objections to parts of the House
for individual taxpayers under the law Maryland, and New Jersey, filed suit bill by Democratic Sens. Joe Manchin,
known as the Tax Cuts and Jobs Act against Treasury and the IRS in July D-W.Va., Kyrsten Sinema, D-Ariz., and
1
(TCJA), enacted in December 2017, 2018, alleging the federal limitation on others were ultimately overcome with
was the $10,000 limitation on the fed- SALT deductions violated the U.S. Con- a substitute amendment that passed in
eral deduction for state and local taxes stitution’s principles of federalism under the Senate and was then approved in
(SALT). Prior to the provision’s effective the Tenth and Sixteenth amendments, the House — but without any provision
date, for tax years beginning before 2018, coercing the states to abandon their pre- relating to the SALT cap. That legisla-
and after its scheduled sunset, for tax ferred fiscal policies. On April 19, 2022, tion was enacted in August 2022 as the
years beginning after 2025, individual the Supreme Court denied a review Inflation Reduction Act. 6
taxpayers may receive a federal income of the ruling from the Second Circuit, At the same time, several states
tax deduction for all state and local real which affirmed the 2019 federal district explored workarounds that would
property taxes, personal property taxes, court decision that the federal SALT allow residents to take a federal SALT
state or local taxes, and foreign taxes deduction limitation did not violate the deduction with no limitation. One such
4
paid during the tax year, provided they Tenth Amendment. The Second Cir- workaround allowed residents to donate
itemize their deductions. cuit noted that Congress surely under- to a local charitable organization and
The Joint Committee on Taxation stood that the limitation on the federal receive a state or local tax credit for the
(JCT) estimated that the $10,000 fed- deductibility of SALT would affect some donation amount, anticipating that the
eral limit on the SALT deduction would states more adversely than others, and federal government would allow the
raise federal revenue by $77.4 billion for nonetheless, like other federal tax laws, amount to be deemed a charitable item-
the 2019 tax year alone. The JCT also the tax law was within Congress’s per- ized deduction. However, the IRS was
estimated that the $10,000 limit, cou- missible legislative purpose of influenc- quick to respond and generally denied
pled with the TCJA’s almost doubling of ing, while not compelling, tax policy. this workaround through amending

1. P.L. 115-97. 4. New York v. Yellen, No. 18-CV-6427 (S.D.N.Y. 9/30/19), aff’d, 15 F.4th 569
2. Joint Committee on Taxation, Tables Related to the Federal Tax System as (2d Cir. 2021), cert. denied No. 21-966 (U.S. 4/18/22).
in Effect 2017 Through 2026 (JCX-32R-18) (April 24, 2018). 5. H.R. 5376.
3. Bellafiore, “Who Benefits From the State and Local Tax Deduction?,” Tax 6. Inflation Reduction Act, P.L. 117-169.
Foundation (Oct. 5, 2018).

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