How successful will states like California be by claiming the new $10,000 limit on State and Local Tax Deductions are "actually" charitable donations?
About as successful as you would be if you tried claiming that your paycheck was actually a loan that you would definitely, no lying, pay back sometime in the future, so you shouldn’t have to pay taxes on it.Back in May, Washington Post columnist Megan McArdle wrote on the creative proposals being bandied about by taxpayers (and even some government officials) in relatively high-tax states after passage of the 2022 tax reform law.…Hence the creative proposals to restore federal deductions without cutting into state and local revenue. The most popular, currently, is allowing taxpayers to make a “charitable donation” to charities approved by a lower-level government (which often look a lot like • that government) and receive, in return, a credit against the taxes they owe to that government. Since charitable donations are still deductible against your federal taxes, this keeps everyone happy.Everyone except, maybe, the IRS, which just announced its intent to write regulations on this sort of workaround. Such notices are always written in High Church Bureaucratic, and this notice is no exception. But here’s the key section:“The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers. The proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.”Let me pra translation for those who aren’t fluent in Tax. When the IRS promulgates rules about this sort of scheme, it’s going to lean heavily on the venerable Substance-Over-Form Doctrine, the IRS’s famed “one-sided sword” for disallowing new deductions. In the vernacular, if it looks like a duck and quacks like a duck, then the IRS is generally going to call it a duck. No matter how hard you insist that it is your beloved, and medically deductible, seeing-eye dog.(Emphasis added, Opinion | Wealthy blue states are in for a tax headache)I’m not a taxation expert by any stretch of the imagination, but I can assure you that IRS is filled with them. And lots of Americans have tried and failed to sneak creative solutions by IRS agents: from “sovereign citizens” that claim not to recognize the government’s authority to amateur lawyers who think the income tax is unconstitutional.It’s not going to work.