AG Grewal Says New Jersey Could Sue IRS Over SALT Tax Guidance

Gurbir Grewal. Office of the Attorney General / Tim Larsen

New Jersey Attorney General Gurbir Grewal threatened to take the Trump administration to court on Thursday after the Internal Revenue Service (IRS) said it would issue new rules that could stop the state from circumventing part of President Trump’s federal tax overhaul.

In a letter to IRS Commissioner David Kautter, Grewal said New Jersey’s new law letting local governments accept property taxes in the form of charitable contributions is similar to laws enacted in more than 30 other states and is consistent with previous IRS guidance. The state’s top lawyer pointed to a 2011 IRS memorandum that said taxpayers can take a deduction for charitable contributions to state and local governments.

“The IRS should not play politics. Instead, it must confirm its longstanding interpretation of federal law,” Grewal wrote. “Should the IRS and Treasury Department continue down this path, New Jersey will have no choice but to challenge the new rule in court.”

Earlier this month, Gov. Phil Murphy signed a bill into law (S1893) allowing municipalities, counties and school districts to set up charitable funds to pay for public services. Residents who donate to the funds can receive a credit of up to 90 percent toward their property tax bills, and those contributions can then be written off as charitable deductions on their federal taxes.

The plan is designed to be a workaround to the new federal tax law that capped the state and local tax (SALT) deduction at $10,000, a move said to disproportionately harm high-tax states like New Jersey. Roughly 41 percent of New Jerseyans who filed 2015 tax returns used the SALT deduction, with the average return claiming nearly $18,000 in deductions from SALT, according to the Tax Policy Center.

“I remain committed to fighting the SALT deduction tax cap and am confident that the solution signed into law can and should be embraced by the IRS,” Murphy said in a statement. “Anything less is a flat-out admittance that politics rather than policy guides the decisions of the Trump administration.”

In a notice released Wednesday, the IRS said federal, not local law, applies when it comes to the federal income tax.

“Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes,” the notice said.

AG Grewal Says New Jersey Could Sue IRS Over SALT Tax Guidance