A federal appeals court yesterday rejected a constitutional challenge to the cap on state and local tax (SALT) deductions on the federal income tax.
The United States Court of Appeals for the Second Circuit affirmed a lower court ruling that dismissed a lawsuit brought by four states, including Maryland, challenging the $10,000 limit on state and local tax (SALT) deductions enacted by the 2017 federal tax reform law.
The appeal challenged the U.S. District Court for the Southern District of New York’s decision to reject the states’ suit, which argued that the SALT cap violated the U.S. Constitution’s Equal Protection Clause and the 10th Amendment, which protects states’ rights.
The SALT deduction allows taxpayers to subtract state and local income, sales, and property taxes from their federal tax payments as part of their itemized deductions. But, Congress in 2017 capped the SALT deduction at $10,000 – a move of particular import in states like Maryland.
Several states — including Maryland — have passed legislation to allow non-corporate businesses to pay state income taxes at the entity level rather than at the individual level on their owners’ returns. Because the SALT cap applies only to individuals, these actions aim to help PTEs avoid the cap.
As previously reported on Conduit Street, the U.S. Treasury and Internal Revenue Service have previously issued guidance to block a different type of state workaround to the SALT deduction cap to convert state and local taxes to charitable contributions.
According to a report from The Government Finance Officers Association (GFOA), 45 percent of taxpayers in Maryland benefitted from the deduction in 2014, more than any other state.
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