Second Circuit Rejects Connecticut’s Charitable Deduction SALT Cap Workaround 

As is commonly known, one of the significant provisions of the Tax Cuts and Jobs Act of 2017, was to place a limit on the ability of taxpayers to deduct their state and local taxes (“SALT”).  One of the responses by many states to the SALT limitation, including Connecticut, was to enact legislation that allowed residents to voluntarily contribute money to a state-administered charitable fund and in return, receive a sizeable state or local tax credit. In Connecticut, municipalities could provide a residential property tax credit for the following year to eligible taxpayers who make voluntary payments to a municipally approved nonprofit that is organized exclusively to support municipal spending on programs and services (i.e., community supporting organizations). The municipality would determine the amount of the tax credit, but it would be limited to the total amount of property tax owed or 85 percent of the donation, whichever is less. Conn. Gen. Stat. § 12-129v as created by Public Act No. 18-49 §10.

However, to counter these workarounds, IRS issued proposed regulations in August 2018, which were finalized and effective as of August 2019, promulgated a regulation to thwart states from circumventing the SALT cap through charitable deductions (the “SALT Regulation”).  The impact of the SALT Regulation was that a taxpayer claiming a charitable-contribution deduction must reduce that deduction by the amount of any state or local tax credit that the taxpayer receives or expects to receive in consideration for the taxpayer’s payment or transfer. In effect, this nullified any federal tax benefit a taxpayer might derive from participation in a state workaround. Following the issuance of the SALT Regulation, several states, including Connecticut, sued the Treasury Department and the IRS alleging that the IRS exceeded its statutory authority by promulgating the SALT Regulation, and that the SALT Regulation was arbitrary and capricious under the Administrative Procedure Act. In 2024, the district court granted summary judgment for Treasury and the IRS. New Jersey v. Mnuchin, No. 19 CIV. 6642 (PGG), 2024 WL 1386080 (S.D.N.Y. Mar. 30, 2024). The States appealed the District Court decision, and last week, the Second Circuit affirmed the District Court decision and held that the IRS did not exceed its statutory authority in issuing the SALT Regulation and that the SALT Regulation was valid. State v. Bessent, No. 24-1499-CV, 2025 WL 2327237 (2d Cir. Aug. 13, 2025).