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Presto Change-o

Back in December 2017, while you were finishing up your holiday shopping and spiking the eggnog, Congress spiked the tax code. The goal was simple. First, eliminate a bunch of deductions that made the whole thing more complicated. Then, take advantage of that broader base to cut overall rates. There’s nothing radical about that sort of tinkering. The hard part is deciding which sacred cows get gored to make it work.Much to many peoples’ surprise, the state and local tax deduction wound up on the chopping block. Until 2018, you could deduct an unlimited amount of state and local income, sales, and property taxes. The new law capped that deduction at $10,000. That’s a big deal in states with high income taxes like California (13.3% top rate), Hawaii (11%), and New York (8.95%). It’s even a problem for a state like Texas with no income tax but high property taxes.Naturally, the high-tax states weren’t jazzed about that part of Uncle Sam’s plan. They struck back with a fiendishly clever proposal that would have dazzled Harry Houdini with its sheer magic. Encourage residents to make gifts to special state funds, then give them dollar-for-dollar credits against their taxes for those contributions. Abracadabra! Now your payments aren’t nondeductible taxes anymore. Now they’re fully-deductible charitable gifts!Last week, the IRS threw a wet blanket over the states’ prestidigitation, issuing 74 pages of final regulations that they could have condensed into a single word. And that word is: “Really?!?” They start out by defining a “gift” as something you make with no expectation of return benefit. Then they go on to explain that if you make a “gift,” and expect to receive a state or local tax credit in return, it’s not a gift. It’s a quid pro quo. And while the tax code is full of deductible quid pro quos, you can’t write them off as charity.The regulations outline a few exceptions to that general rule, including programs that give you dollar-for-dollar deductions (as opposed to credits), and programs that credit your tax bill for less than 15% of your gift. (They wouldn’t be Treasury regulations without fine print, right?) But it really just comes down to substance over form. The IRS essentially said, “Look, it walks like a duck, it quacks like a duck, and if we put our tongue on it, we bet it tastes like a duck, too. So it’s a tax, not a charitable contribution. Better luck next time!”The truly amazing thing about the regulations isn’t that they run 74 pages. (74 pages!) It’s that they take the states’ argument seriously in the first place. Of course the IRS was going to shoot them down! Are you kidding? If you surprise your six-year-old in the kitchen with crumbs all over his face, you don’t listen to his excuses for why the cookies are gone. You give him an immediate time-out, not “due process”!In the end, the change was more bark than bite. Many of affected taxpayers had already lost their state and local tax deductions to the alternative minimum tax. Even the ones who wound up paying tax on more income benefited from the lower overall rates.Want some good news? You don’t need to perform sleight-of-hand with the tax code to pay less. The law is full of legitimate deductions, credits, loopholes, and strategies you can use to pay the legal minimum. And you don’t need to risk the IRS laughing at your arguments to succeed. So call us for a plan, see how much you can save, and let us worry about the 74-page regulations!