NJ joins lawsuit challenging cap on federal deductions for state and local taxes

The New Jersey Attorney General  has joined three other states in suing the Trump Administration over its $10,000 cap on the federal tax deduction for state and local taxes (SALT).

New Jersey, New York, Connecticut and Maryland are suing both the Internal Revenue Service and the Treasury Department. The lawsuit seeks to prevent the federal government from enforcing the SALT deduction cap, and to have the cap declared invalid.

“Today we are making good on our promise to fight for New Jersey taxpayers – by taking legal action to protect our residents and restore fairness to the tax code,” said Attorney General Grewal. “Simply put, the federal government violated the constitution when it imposed new, arbitrary limits on the amount of state and local taxes that residents could deduct on their federal tax returns.”

Taxpayers who itemized their deductions previously were able deduct all money paid for state and local income, property and sales taxes from their federal tax liability. Under the new code adopted in late 2017, the same taxpayers are only permitted to claim a comparatively small deduction of up to $10,000 for those taxes.

The lawsuit claims that the SALT deduction on individual federal tax liability has historically been recognized by Congress as essential under the Constitution. “A SALT deduction has been a part of every federal income tax law since the first federal income tax was enacted in 1861,” reads the complaint. The lawsuit also argues that the SALT deduction is necessary to prevent federal taxes from interfering with each state’s right to determine its taxation and fiscal policies, because federal taxes crowd the states out of traditional revenue sources like income, property and sales taxes.

According to the lawsuit, the federal government’s decision to cap the SALT deduction at $10,000 will significantly increase the federal tax liability for residents of each of the plaintiff states, including New Jersey. Homeowners who could once deduct the full cost of their local property taxes now can only deduct a fraction of those taxes. That will increase the cost of owning a home, which in turn will depress home values, the lawsuit argues. The lawsuit also argues that the federal government went after these states deliberately to change their spending policies. The complaint argues that this is another reason why the latest SALT changes are illegal.

One Comment

  1. Here’s an idea. Cut the obscene cost of NJ State government and lower taxes. Problem solved. I’ve benefitted tremendously from this loophole – much like the Governor and his Greedman Sachs partners have benefitted from the carry forward exemption – but, come on, fair is fair.

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