Treasury, IRS propose changes to block circumvention of tax caps

Aug. 24 (UPI) -- The Treasury Department and the Internal Revenue Service proposed rules designed to block some states' attempts to evade the cap on local property taxes.

The changes to the tax law last year are meant to challenge plans by some high-tax, Democratic-leaning states to circumvent the $10,000 cap on deductions for property tax payments.

New York, New Jersey and Connecticut -- three states with high property taxes -- produced legislation by which municipalities could establish charitable funds and permit contributions from taxpayers. The contributions would be regarded as a state tax credit.

The cap means property owners in high-tax states will have a lower deduction on taxes. The average deduction in New York State for state and local taxes was $22,000 in 2015, CNBC reported, citing the Tax Policy Center.

Details of the plan to limit circumventing of the tax code were in a 36-page report released Thursday.

"Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families," said Treasury Secretary Steven Mnuchin. "The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions."

New York, Connecticut, New Jersey and Maryland filed suit against the Treasury Department and the IRS in July, alleging that the $10,000 limitation on the new state and local tax deductions calling it an "unconstitutional assault on states' sovereign choices," CNBC reported.