Ways around deductions cap? Rudy’s looking

Could the town or state restructure local taxes to circumvent federal tax code changes and preserve the deductions Ridgefielders have long used to hold down their payments to the IRS?

First Selectman Rudy Marconi thinks it’s worth a look — although changes serving that goal would be difficult to design, and their legality would doubtless draw close scrutiny from Washington.

“If you know the current tax plan, people who itemize, which comprises a large number of people in Ridgefield, can no longer deduct their state income tax and local property tax,” Marconi said.

“You can still do it,” he added, correcting himself, “but you’re allowed a maximum of $10,000 in deductions — it’s capped.”

With state income tax (which runs from 3% to 6.99%) combined with local town property taxes, many Ridgefielders pay taxes well over the new cap on SALT (state and local tax) deductions put into effect by the federal tax law changes approved by Congress in December.

“How do we get around that cap?” Marconi said.

The idea is to restructure local taxes — by the state, or the town — to achieve the goal the deductions now being capped had long served: namely, to avoid having Ridgefield and Connecticut residents pay federal income taxes on money that isn’t part of the income that’s theirs to spend, since it’s taxed away from them by state and local governments before they get their hands on it.

The first selectman shared some thoughts on the problem before heading off to Hartford on Monday, Jan. 22, to discuss tax and budget concerns of the Council of Small Towns (COST) with state legislative leaders.

“There’s no question the federal tax plan is going to come up, I’ll definitely be bringing that up,” Marconi said. “The state of Connecticut, to my knowledge, although they may be working on something, they’ve been quiet. And we have no knowledge the state is working on any kind of a program.”

Next door neighbors

New York state faces similar problems as a high-tax state with many residents who’ll go over the new federal deductibility limits. New York Gov. Andrew Cuomo has been researching the question, and came up with a number of avenues to explore. One is dropping the state income tax in favor of “a progressive employer compensation expense tax” — essentially having companies, which retain their ability to write off and deduct taxes, pay a tax on compensation before it is given to workers. Employees, in theory, would have lower salaries but their take-home pay would be the same, because their taxes would be paid by their employers, and not taken out of their paychecks.

New York is also looking into whether there might be ways people could make charitable contributions — which would still be deductible — rather than pay state and local taxes.

Marconi hopes to discuss these and other ideas with state legislators.

“I made a copy of Gov. Cuomo’s report, and the many alternative suggestions that his office has come up with,” Marconi said.

He’s looking for potential changes the the town might make.

“We would like to create a vehicle that allows the residents of Ridgefield to still be able to take advantage of a deduction, but using some other form of deduction — that’s what we’re working on,” Marconi said.

Public education

One idea might be to set up a charity benefiting, say, the Ridgefield Public Schools, which spend about 65% of the town’s tax money. The town might then offer taxpayers some kind of local tax rebate in recognition of their donation to public education.

“Instead of making a payment for your taxes, you’d be afforded the opportunity to make that payment to the Ridgefield Public Schools Foundation, a 501(c)(3),” Marconi said.

“Then, once you have paid that, you bring that back to the town and say, ‘I want a credit,’ and we, then, the Board of Selectmen — which is the authorized tax abatement committee for the town of Ridgefield — would issue an abatement for that portion of your taxes that you chose to pay to the 501(c)(3).”

He added, “The question is, Will the IRS look at that as a tax diversion?”

Whether a donation to town schools would legitimately qualify as a tax deduction is not a question easily or confidently answered — particularly if there’s a balancing rebate from the town.

“In meeting with tax attorneys, which I have done, there is a degree of pessimism based on the IRS tax code, where they feel a tax deduction for property taxes may not be allowed because you are receiving something in exchange for the deduction, which would be a credit to your property taxes,” Marconi said.

“You’re receiving something in return, which is what the IRS says you cannot do.”

The idea seems questionable, but that doesn’t mean it’s not worth exploring — especially in light of the way the federal tax code changes take aim at higher tax areas like Connecticut.

“This sounds more like a scheme than a legitimate effort, but the scheme is the fed tax plan,” he said, “to put money in the pockets of corporations and the upper 1% by taxing the middle class.”

‘What are you doing?’

Marconi said he’s also planning to attend a meeting, being set up through Congressman Jim Himes’ office, to see what several towns from another nearby high-tax state, New Jersey, have come up with to deal with the issue.

Both that meeting and his discussions with state officials in Hartford are preliminary — part of an effort to see if there’s anything local state and town officials can do to address the tax code changes that appear designed to put more of the national tax burden on federal taxpayers in high-tax towns like Ridgefield.

“Just letting the state know the direction we’re looking in,” Marconi said, “and asking the state, What are you doing? Are you looking at things like the state of New York, in terms of state income tax?”