NY, NJ Fail in Court Bid to Keep Their SALT Cap Workarounds (1)

States failed to overturn a Treasury Department ban on programs that allowed residents to bypass the federal SALT cap by directing their tax payments to state-run charities and claiming a more generous deduction.

The Second Circuit rejected New York’s, New Jersey’s, and Connecticut’s arguments that the regulation contravened the federal charitable deduction statute, IRC Section 170. The rule limits the available federal charitable deduction where the donor earned equivalent SALT credits for their donation.

The three states, which have relatively high SALT burdens and wealthy residents who would benefit from greater deductions, each tried to use the federal charitable contribution deduction to work around the cap by permitting taxpayers to contribute to state-administered charitable funds and claim federal charitable, rather than SALT, deductions. Together, they sued Treasury for closing that option, arguing its 2019 final rule violated the Administrative Procedure Act.

But the rule isn’t arbitrary or capricious, Judge Robert D. Sack said for the US Court of Appeals for the Second Circuit, and it “correctly interprets” the Tax Code.

The $10,000 deduction cap, established in 2017, was recently changed by the tax package signed July 4 by President Donald Trump. The cap was temporarily raised to $40,000 annually for a five-year period, with a phase out for taxpayers who make more than $500,000 per year.

The court rejected the states’ arguments that a tax deduction shouldn’t be treated as a charitable event in the same way a tax credit is because they produce different financial outcomes.

It also rejected the states’ arguments that the IRS was weighing financial considerations that Congress didn’t intend it to consider. The IRS must consider the whole of the tax code and its various revenue-raising provisions when it puts together a final rule, with Congressional intent serving as the “background,” Sack said.

Judges Beth Robinson and Myrna Pérez joined the opinion.

The New York, New Jersey, and Connecticut attorneys general represent their respective states. Baker & McKenzie LLP and Kostelanetz LLP represent the Village of Scarsdale, N.Y., which joined the appeal.

The case is New Jersey v. Yellen, 2d Cir., No. 24-1499, 8/13/25.