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NJ tax law changes to work around federal tax overhaul

EAST RUTHERFORD, N.J.— Aiming to cushion the effect of the federal tax overhaul’s limit on state and local tax deductions, New Jersey Gov. Phil Murphy on Friday signed into law a bill letting people deduct their property tax bills as charitable contributions.

“What the Trump administration enacted … was nothing more than a tax hike on our working and middle-class families and seniors,” said Murphy, a Democrat, who signed the legislation alongside U.S. Sen. Bob Menendez, Rep. Bill Pascrell and other officials.

The 2017 federal tax law caps state and local tax deductions at $10,000. That led officials in high-tax states like New Jersey scrambling to blunt the potential impact. A similar measure to New Jersey’s has been enacted in New York and is under consideration in California, though it remains to be seen whether the Internal Revenue Service will allow it to work as intended.

Under New Jersey’s legislation, towns and school districts collecting property taxes may set up charitable funds.

Taxpayers would make donations to the funds and get a deductible tax credit in return, worth up to 90 percent of the donation. The new federal tax law does not cap charitable deductions.

New Jersey has among the highest property tax rates in nation, with the average bill at nearly $8,700 in 2017. More than 40 percent of filers itemized deductions in 2015, with the average deduction at about $18,000, according to Murphy.

Lawmakers said the measure effectively restores the limitless deductions on state and local property taxes.

Republicans have questioned the legislation. Republican state Sen. Joseph Pennacchio has called it a “scheme.” Others have questioned whether the IRS would permit the workaround to function.

But Democratic Rep. Josh Gottheimer told The Associated Press that 33 other states already allow similar charitable contributions, particularly for private school tuition payments.

Gottheimer says he has met with the IRS on the charitable contribution and came away thinking the agency might permit the charitable contributions to go forward.

“My read was if they want to prevent it in New Jersey they’re going to have to shut it down in 33 other mostly red states,” he said.

Murphy has taken other steps to blunt the harm of the $10,000 state and local tax deduction cap.

Attorney General Gurbir Grewal asked the IRS to agree that prepaid 2018 property taxes would qualify for deduction, and Murphy signed a law expressly permitting prepayments.

He’s also proposing in his 2019 budget to raise the state’s state property tax deduction cap from $10,000 to $15,000.