Computing your divorce clients’ state and local taxes that often affect property settlement negotiations may have just become even more complicated. While your CFL Designation for Divorce Practitioners gives you the advanced financial knowledge necessary to understand federal and state tax issues, keeping up with the ever-changing tax laws can be problematic at best.
Now, just when you thought you had the Tax Cuts and Jobs Act changes well in mind, four states sued the U.S. government in federal court just last week seeking injunctive and declaratory relief to invalidate the $10,000 deduction limit taxpayers can take on their federal income tax return for their state and local taxes.
Lawsuit Allegations
Connecticut, Maryland, New Jersey and New York joined together in this suit, alleging the following:
- That the new tax cap “effectively eviscerates the SALT deduction”
- That “the SALT deduction is essential to prevent the federal tax power from interfering with the States’ sovereign authority to make their own choices about whether and how much to invest in their own residents, businesses, infrastructure, and more”
- That the deductibility restriction violates the Tenth Amendment and “foundational principles of federalism” because it “deliberately seeks to compel certain States to reduce their public spending”
- That it “cannot be reconciled with the limits on the federal government’s tax powers under Article I, Section 8, and the Sixteenth Amendment”
- That their residents not only will see a significant increase in their federal taxes, but also will “receive the least benefit from” the TCJA
- That it will cause “significant and irreparable direct harm” to these states and their residents, including depressed home values and reduced state revenues
Taxpayer Cost
The $10,000 tax deduction cap applies to married taxpayers who file jointly. For married taxpayers filing separately, the cap is $5,000. Either way, the cap includes all the state and local income, real estate and sales taxes that individuals pay.
Per figures contained in the Preliminary Report on the Federal Tax Cuts and Jobs Act issued by the New York State Department of Taxation and Finance in January, the tax deduction cap will cost New York individual taxpayers an estimated $14.3 billion per year. Prior to the cap, New Yorkers took a $22,000 deduction on average, while taxpayers in both California and New Jersey took an average $18,000 deduction.
Governors’ Opinions
Governors of the four states involved in the lawsuit have weighed in with their opinions of the TCJA’s tax cap. For instance, New York Gov. Andrew Cuomo stated that the new provision “preempts the states’ ability to govern by reducing the ability to provide for their own citizens and unfairly targets New York and similarly situated states in violation of the Constitution.” New Jersey Gov. Phil Murphy stated, “It is a clear and politically motivated punishment of blue states.”
Whatever the outcome of this lawsuit, experts predict that other states, too, may challenge the TCJA’s tax cap this year before its provisions negatively affect their residents when they file their 2018 taxes next April.
For more information on financial issues you need to be aware of, how gaining your CFL Designation for Divorce Practitioners will give you the financial knowledge and skills you need to attract additional high-asset clients, and the other benefits of AACFL membership, please visit this page of our website.
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