Blue States sue IRS over new rule that prevents taxpayers obtain full charitable deductions

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New Jersey lawsuit IRS
New Jersey Gov. Phil Murphy announces lawsuit against IRS, Treasury Department

The U.S. Internal Revenue Service (IRS) and the Department of Treasury are facing a lawsuit filed by blue states on Wednesday.

New Jersey Governor Phil Murphy announced the lawsuit, which challenges a new rule that prevents taxpayers from obtaining full federal deductions on their charitable contributions.

The States of Connecticut and New York are part of the litigation against the IRS and the Treasury Department.

In the complaint, the plaintiff states alleged that the IRS and the Treasury Department’s new rule “undermines state and local programs designed to promote charitable giving through the use of state and local tax (SALT) credits.”

The States of Connecticut, New Jersey, New York and many other states developed charitable giving programs to help taxpayers avoid the negative impact of the cap on SALT deductions.  In 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act, which contains a provision limiting SALT deductions to $10,000.

The IRS new rule prevents taxpayers from obtaining full federal deductions on their charitable contributions to local and state programs, which is unlawful under the Administrative Procedure Act (APA), according to the plaintiff states.

In addition, the plaintiff states argued that the IRS new rule is “arbitrary, capricious” and “violates the Regulatory Flexibility Act.”

IRS new rule unfairly targets blue states

During a press conference, New Jersey Gov. Murphy said, “As I said when the IRS rule was finalized in June, it was nothing more than a gut punch to the middle-class New Jersey families who know that the Trump tax plan is a complete sham. It was a complete and total utter politicization of the federal tax code.”

In a statement, New York Gov. Andrew Cuomo commented, “The Trump administration and the IRS are trying to undermine states’ efforts to protect our taxpayers against the unprecedented, unlawful and politically motivated capping of the SALT deduction. The final IRS rule flies in the face of a century of federal tax law that says state choices to provide tax incentives for charitable donations do not affect the federal deductibility of those gifts. Our message to Mr. Trump and the IRS is simple: we look forward to seeing you in court.”

Meanwhile, Connecticut Governor Ned Lamont said, “The federal tax reforms approved by Congress were promoted as a tax-cut, but in reality they’ve resulted in a tax hike for millions citizens, including thousands here in Connecticut. This was a purely partisan bill and – let’s be frank – aimed directly at blue states like Connecticut, New York, and New Jersey. It’s unfair, discriminatory, and unconstitutional.”