The 2017 federal tax reform legislation included a limitation on the individual itemized deduction for state and local taxes (“SALT”). The limit is $10,000 per joint return and $5,000 per return for married taxpayers that file separately.
Some high individual tax states attempted to help their taxpayers blunt the effect of this new limitation by allowing them to make charitable contributions to the state in exchange for a corresponding credit against their individual state taxes. The expectation was that individuals doing so would be able to deduct the full charitable contribution on their federal income tax returns, and thereby reduce the effect of the SALT deduction limitation.
The IRS and Treasury responded, however, by issuing regulations limiting the deduction for such charitable contributions. The IRS viewed the changes made by those states as inappropriate attempts to “circumvent” the 2017 SALT deduction limitation.
Wisconsin also subsequently passed legislation motivated in large part by the federal SALT limitation. It does not apply to all taxpayers. Instead, it provides a potential means for owners of Wisconsin entities taxed as S corporations (“tax-option corporations” in Wisconsin terminology) or as partnerships (which would include most multi-member LLCs) to reduce the adverse effect of the federal SALT deduction limitation. Read More