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I was reading IRS Stops Attempt To Bypass Trump Tax Law, MD Lawsuit Continues. The article states:

... The IRS said Tuesday that states cannot bypass a $10,000 cap on state and local tax (SALT) deductions imposed by the Republican tax law of 2017. That hurts taxpayers in high property tax states like Maryland.

The IRS effectively nullified legislation in New Jersey and several other states that allowed municipalities to establish charitable funds where taxpayers can donate in return for a property tax credit. The legislation was intended to protect taxpayers from a potential increase in the federal income tax as a result of the Trump Administration's cap on the state and local tax deduction (SALT).

The article is brief, and seems to lack the exact details how how the federal government is achieving its goals. Or maybe it is there and I don't see it (fiat?).

In any case, I thought states are allowed to determine their own criteria for tax credits. It seems like the federal government is imposing tax law at the state level.

Does the federal government have authority to impose tax laws at the state level?

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They aren't "imposing tax laws at the state level", and the states are still perfectly free to award whatever credits they like. There's a more complete explanation here.

Before 2017, if you paid, say, $30,000 in state taxes, you could take a $30,000 deduction from your federal taxable income, thus reducing your federal income taxes by some fraction of $30,000 (depending on your tax bracket). The 2017 tax bill placed a $10,000 limit on this deduction. Some states responded by creating a provision where you could donate $30,000 to the state and receive a $30,000 credit against your state taxes owed - so you end up paying the same amount to the state, but now you characterize it as a charitable donation, which is still deductible from your federal taxable income.

The new IRS regulation says that such a "donation" will no longer be deductible from your federal taxable income; that's all. Your state can still issue you a tax credit for such a donation if they want - the federal government has no control over that - but any such credit will reduce the amount you are allowed to deduct on your federal return, making the whole exercise pointless.

The federal government certainly has the power to determine how you should compute your income for the purposes of your federal income taxes, including what you may or may not deduct. That's the power they're using here.

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