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IRS issues notice on state and local tax deductions

On May 23, 2018, the IRS released Notice 2018-54 stating further guidance is coming to address the deductibility of state and local tax payments for federal income tax purposes.

The Tax Cuts and Jobs Act (TCJA) limited the amount of state and local taxes an individual can deduct to $10,000. As a result, some state legislatures have adopted or are considering legislative proposals allowing taxpayers to make payments to specified entities in exchange for a tax credit against state and local taxes owed. 

The proposed legislation will clarify the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction of state and local taxes. The IRS noted the new regulations will apply substance-over-form analysis in determining how these payments will be treated for federal income tax purposes.

The IRS advised taxpayers to be aware the U.S. Department of the Treasury and the IRS are continuing to monitor other legislative proposals being considered and stresses that federal law controls the characterization of deductions for federal income tax filings.

We will provide additional information when final guidance is issued. Should you have any questions, please contact your Rehmann advisor.

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