On April 18, 2022, the U.S. Supreme Court denied to hear a case brought by New York, Maryland, Connecticut and New Jersey to lift the $10,000 limitation on federal deductions for state and local taxes. The State and Local Tax (SALT) limitation was enacted under the 2017 Tax Cuts and Jobs Acts and has since been a contentious issue among many state Governors.
The four states brought a lawsuit challenging the constitutionally of this law on the grounds that it violated their constitutional sovereignty and taxing power as a state. However in 2021, the Manhattan Second Circuit Court of Appeal rejected their arguments, thereby giving these states an opportunity to petition the U.S. Supreme Court – which later rejected their challenge.
The constitutional challenge by these states has presumably ended here. However, many states have enacted pass-through entity workarounds – most recently Virginia – to decrease the impact of the SALT limitation. These workarounds generally create a state income tax imposed directly on a pass-through entity whereby the entity can claim a business deduction for state taxes. The business deduction is not subject to the $10,000 SALT limitation. Then deduction then flow-through to entity’s owners through a reduction in their share of net income thereby circumventing the SALT limitation imposed on individual at the federal level.
If you have questions whether your state has enacted a SALT workaround or if you have questions on the rules on credits for taxes paid to another state, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301-231-6200.