Four northeastern states filed a federal complaint Wednesday about the cap on state and local tax deductions in the new tax bill, Forbes reports.
The bottom line: Connecticut, Maryland, New Jersey, and New York claim the cap will raise tax liability for millions of taxpayers. Because people living in these states pay high state and local tax rates, if they are no longer allowed to deduct as much money off their federal taxes, they may consider living elsewhere to avoid that tax burden.
- Before the Tax Cuts and Jobs Act, there were no specific limitations on the amount of itemized deductions for state and local taxes.
- Now, the amount taxpayers may claim on Schedule A for all state and local sales and income and property taxes combined may not exceed $10,000, or $5,000 for married taxpayers filing separately. That means individuals who pay high state and local tax can only deduct $10,000 from their federal tax.
- In the past, only 30% of taxpayers decided to file itemized deductions instead of filing standard tax deductions, per the Internal Revenue Service. High-income households are more likely to itemize because they have more personal property.
- The states are suing the U.S. as well as Treasury Secretary Steven Mnuchin, IRS acting Commissioner David Kautter, the U.S. Treasury, and the IRS.
- The plaintiffs argue the state and local tax cap increases the federal tax burden on taxpayers in targeted states.
- The states also claim they will not be able to make policy decisions without federal interference, which will make it harder for them to maintain their taxation and fiscal policies — a direct violation of the Sixteenth Amendment.
- Essentially, the states and several interest groups argue the new state and local tax cap could artificially depress home values.
- The New York State Department of Taxation and Finance revealed that the cap will increase New Yorkers' federal taxes by $14.3 billion in 2018, and by $121 billion between 2019 and 2025, per a statement from New York Attorney General Barbara Underwood.
What to watch: The case will come down to interpretation of whether the deduction is a benefit or a constitutional right, Adam Beckerink, Tax partner at Morgan, Lewis & Bockius LLP told Forbes. "Many will be watching to see if other states join the suit and if the federal government will increase its scrutiny of the ‘workaround’ processes that were previously passed by the States."
