The U.S. Department of the Treasury and the Internal Revenue Service issued a notice yesterday informing taxpayers that proposed regulations will be issued addressing the deductibility of state and local tax payments for federal income tax purpose.

The notice was in response to the many states, including New York and New Jersey, that have passed laws or proposed legislation creating state controlled charitable funds which would accept payments characterized as charitable deductions in exchange for a credit against state income and/or real estate taxes.   The notice indicated that the characterization of these payments would be determined under the federal law and not the label or characterization of the payments assigned by the state.

The Tax Cuts and Jobs Act (TCJA) enacted for tax years beginning Jan. 1, 2018 and ending December 31, 2026, limited the amount of state and local taxes an individual can deduct in a calendar year to $10,000. After the TCJA’s passage, certain state legislatures—specifically, those of high-tax states—began initiatives to mitigate the effect of these deduction limit for their residents.

As stated by the IRS, the upcoming proposed regulations, to be issued in the near future, will help taxpayers understand the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction of state and local taxes and make clear that the requirements of the Code, informed by substance over form principles, govern the federal income tax treatment of such transfers.

It was widely anticipated that the IRS was going to fight these efforts to get around the federal legislation that would have the effect of increasing the Federal taxes for residents of high tax states.