When Congress passed and President Trump signed the 2017 “The Tax and Jobs Act” this new law limits the taxpayer’s itemized deductions for State and Local Taxes and Real Estate Taxes to no more than $10,000.
High tax states like California, New York, New Jersey, Illinois, and Connecticut are looking to use their respective laws to circumvent this cap of $10,000.
The Internal Revenue Service just issued a new Notice 2018-54 which makes clear that federal law controls the characterization of the payments for federal income tax purposes regardless of how these payments may be characterized under state law.
Therefore, these and other states which are trying to circumvent the new law are being told that their efforts are futile. So, what option do these states have? Sue the federal government, of course!
Now the fun begins. States can file in their district courts and hope the ruling favors them. Of course, the IRS and federal government will appeal. What happens when one district agrees with the state and another district agrees with the federal government? The Supremes get the case. Can the states bypass this process and go directly to the Supremes?
According to my non-legal understanding, the only way for a case to be in the Supreme Court’s original jurisdiction is for it to be between a state and the United States, or between one or more states and one or more other states. It’s the latter situation which comprises most of the original jurisdiction cases brought before the Supreme Court.
As a tax practitioner, it is my responsibility and duty to follow the tax law as passed and interpreted by the IRS. My goal is to protect my clients from any unwarranted actions by the IRS.
What should bother taxpayers is that these high tax states will be using taxpayer funds in what will certainly be an exercise in futility.
As a professional, this should be “fun” to watch!!