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New Jersey Gov. Phil Murphy Copyright Dave Kotinsky, Getty Images
New Jersey Gov. Phil Murphy

High-Tax States Sue IRS Over SALT Deduction Workarounds

The states of New York, Connecticut and New Jersey filed a lawsuit over the $10,000 cap on taxpayers' ability to deduct their state and local taxes.

The state of New Jersey has filed a lawsuit against the Internal Revenue Service over its $10,000 cap on state and local tax deductions. 

New Jersey Gov. Phil Murphy announced the lawsuit Wednesday morning, CNBC reported, naming Treasury Secretary Steven Mnuchin as one of the defendants. 

The lawsuit arises from the Tax Cuts and Jobs Act's $10,000 limit on deductions for state and local income, sales and property tax that individuals could itemize and claim on their tax returns. Because of high taxes in New Jersey—and New York and Connecticut, which have joined the lawsuit—the states created a workaround, passing legislation that would allow municipalities to establish charitable funds to pay for local services and offer property tax credits to incentivize homeowners. 

That would allow the individuals to write off the payment as a charitable deduction on their federal tax returns. The IRS and Treasury Department blocked the strategy in June, prompting the lawsuit.

“As I said when the IRS rule was finalized in June, it was nothing more than a gut punch to the middle-class New Jersey families who know that the Trump tax plan is a complete sham,” Murphy said at a press conference. “It was a complete and total utter politicization of the federal tax code.”

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