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Local Editorials

IRS sends warning on loopholes

State legislators in Illinois, California and Connecticut are well advised to take notice of a recent warning from the Internal Revenue Service not to play games with the new federal tax law.

Angry over a new law that limits the deduction for state and local taxes to $10,000, legislators in various states are trying to pass legislation creating what they hope will be loopholes in the new measure.

They’re encouraging taxpayers to characterize tax payments as charitable contributions so they can receive full deductibility. But the IRS announced recently that it won’t be fooled.

The IRS said it would not tolerate states that try to flout the law — a stance that is likely to be challenged in court.

In Illinois, pending legislation would create the Illinois Excellence Fund to which taxpayers would receive a tax credit in exchange for a contribution.

Fund money would then be funneled into state government coffers, but the process would provide a means of exceeding the $10,000 cap on state and local tax deductions for federal income tax purposes.

Meanwhile, New York is in the process of coming up with a plan to convert state income taxes to payroll taxes, the theory being that employers would cover the payroll taxes that would be fully deductible from their federal taxes.

This is an effort by state officials to protect upper-income taxpayers who itemize their federal tax deductions and pay substantial sums in state income taxes and local property taxes.

The vast majority of federal taxpayers takes the standard deduction rather than itemize deductions. Of those who itemize, many will not exceed the $10,000 cap on state and local tax deductions.

But state governments are concerned because really high income earners will pay more in federal income taxes with the $10,000 cap in place and, as a consequence, will be less tolerant of state and local tax increases if they are not fully deductible.

So state officials aren’t necessarily concerned about high taxes paid by their residents but their residents being less tolerant of higher state and local taxes because they are not fully deductible.

Whatever the IRS decides would be subject to a legal challenge for the court to resolve.

Two issues come to the fore in this discussion. For starters, allowing state residents on a broad scale to avoid federal taxes would cost the U.S. Treasury a substantial sum of money. Further, the IRS has always taken a dim view of artificial contrivances taxpayers and their accountants pursue to evade their lawful tax liability.

State governors in the high-tax states affected by the IRS announcement reacted angrily to the news. New York Gov. Andrew Cuomo said the IRS announcement shows the Trump administration’s “true hostility to New Yorkers and middle-class taxpayers.”

Actually, what the IRS is showing is that it will take more than a little legislative subterfuge disguising tax payments as charitable donations — or anything else — to survive legal scrutiny.

That can hardly come as a surprise even to those state officials in Illinois and elsewhere who are posturing and preening on this issue to win favor from constituents.

The (Champaign) News-Gazette originally published this editorial, which was distributed by The Associated Press.

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