States are Enacting Workarounds to Help Businesses Avoid $10,000 Limit on Individual Deductions for State and Local Taxes

Several states are enacting workarounds to help businesses avoid the Federal Government’s $10,000 limit on individual deductions for state and local taxes, or “SALT” deductions. This limit is due to the Tax Cuts and Jobs Act (TJCA) that was signed by President Trump in December 2017. Prior to the TCJA, taxpayers choosing to itemize on their Federal tax return could deduct their state and local income, property, and general sales tax payments. Once the TJCA was signed into law, the new limit became effective.

SALT Deduction Limits Starting in 2018

  1. Capped at $10,000 per return for single filers, head of household filers, and married taxpayer who file on a joint basis.
  2. Capped at $5,000 per each return for married taxpayers who file on a separate basis.

Will the Federal Government Uncap the SALT Deduction Limit?

There is some discussion to remove this limit and “uncap” SALT deductions. However, the independent Tax Foundation analysis of this topic shows this would only benefit taxpayers at the top percentiles. Also, even with the possibility of raising the top individual income tax rate to 39.6%, a move to uncap these deductions would result in less revenue collections for the federal government.

Taxpayers in the top tax brackets gain the most from uncapping the limit. Notably, such a move would make the nation’s tax code less progressive. As a result, taxpayers in the top brackets would receive a tax cut. Therefore, some states are enacting workarounds to help some taxpayers reduce the impact of the new SALT deduction limit.

What Does the Internal Revenue Service Say About How States are Enacting Workarounds?

On May 23, 2018, the Internal Revenue Service issued Notice 2018-54 to state its intention to disallow federal deductions if state tax credits are allowed for individuals relating to charitable deductions. Effectively, some states are enacting workarounds that would allow taxpayers to:

  1. Characterize specific fund transfers as deductible charitable contributions for federal income tax purposes
  2. Use these same fund transfers to satisfy state or local tax liabilities

As a result, these types of workarounds for individual filers most likely will not be allowed. Also, both the Internal Revenue Service and the Treasury Department will issue regulations to clarify for taxpayers the relationship between the SALT limit versus charitable contributions that are deductible for federal income tax filers.

If States are Enacting Workarounds, Will Internal Revenue Service Allow Them?

Several states are enacting workarounds to provide a measure of relief for those who may be able to participate through the use of taxes on specific pass-through businesses. However, it is not clear that all taxpayers can benefit from these workarounds. These programs provide methods that do allow some entities to avoid the $10,000 limit on individual deductions for state and local taxes. The Internal Revenue Service has not yet publicly disallowed these types of workarounds.


The state of Connecticut enacted Public Act No. 18-49 that creates a Pass-Through Entity (PTE) Tax of 6.99% that applies to:

  • S Corporations
  • Partnerships
  • Limited Liability Corporations (LLCs) treated as Partnerships for federal income tax purposes

The PTE Tax provides a tax credit for these entities that is an effective workaround for the SALT deduction limit. The tax credit is a refundable credit that is equal to the shareholder’s, partner’s, or member’s share of the PTE tax paid by the PTE. 93.01% is the multiplier for this amount. This format may become a model for how states are enacting workarounds.


The state of Oklahoma enacted HB 2665, the Pass-Through Entity Tax Equity Act. HB 2665 creates a similar PTE Tax workaround to that of Connecticut. The Oklahoma corporate income tax rate is currently 6%. Also, the PTEs electing to pay Oklahoma income tax on the entity level will receive an offsetting deduction. This offsetting deduction will be equal to the allocation of state income, gain, loss, or deductions.


The state of Wisconsin enacted Senate Bill 883. This bill was signed into law and created 2017 Wisconsin Act 368. This Act allows the election of PTEs to be taxed at the entity level. According to the Act, the PTE Tax is 7.9% on the PTE’s net income that derives from Wisconsin. However, this Act does not allow claims for losses and credits, other than a credit for tax paid to other states.

If States are Enacting Workarounds That Will Stand, What Does This Mean?

Several states are enacting workarounds to help businesses avoid the limit on SALT deductions. As a result, employers in these states should take note to provide new hires and transferees with information. The ability to allow PTEs the option to pay tax at the entity level may provide significant benefits for some taxpayers. However, the process may still come under further Internal Revenue Service scrutiny. In all cases, taxpayers should consult qualified tax advisors and professionals for guidance.

What should Employers do?

Where states are enacting workarounds, employers should take notice and identify helpful resources to share with new hires and transferees. The creativity of each state’s tax policy and ability to circumvent SALT deduction limits might provide valuable incentives for new hires and transferees. Relocation Management Companies (RMCs) can provide expert assistance to employers to benchmark their relocation policies and add enhancements that attract talent. RMCs can also identify helpful resources for employers to communicate their state’s position on SALT deduction limit workarounds. They can also identify which states are enacting workarounds.


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Learn best practices from Global Mobility Solutions, the relocation industry and technology experts who are dedicated to keeping you informed and connected. Contact our experts online to learn about how states are enacting workarounds to SALT deduction limits, or call us at 800.617.1904 or 480.922.0700 today.

GMS is not a tax advisor and is only disseminating public information. Everyone’s tax situation is different; individuals and employers should always consult their tax advisors prior to making any decisions.

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