High-tax states join up to sue feds over tax bill that cuts deductions

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Suburban neighborhood in central Connecticut. Copyright KenWiedemann Getty Images/iStockphoto
By Ben Popken with NBC News
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Homeowners in areas with high state and local property taxes are hopping mad after the tax overhaul — and now some governors are fighting back.

Homeowners in areas with high state and local property taxes are hopping mad after the new federal tax bill passed — and now Democratic governors in some of those states are fighting back.

New Jersey and Connecticut joined New York in suing the federal government over the new GOP-led tax overhaul plan signed by President Donald Trump just before Christmas. The plan would cap the deductions taxpayers can take for their state and local taxes, or SALT, including their property taxes, at $10,000 — less than half what New Jersey's average property owner currently claims.

Here's an example, courtesy of Bankrate.com's chief financial analyst Greg McBride.

A homebuyer looking to buy a $1.2 million dollar home with a $1 million mortgage at 4.25 percent would have an annual tax bill of $24,000. Under the old law, the entire $24,000 bill would have been deductible. Now just $10,000 of it will be deductible.

Additionally, under the old law, the entire $1 million mortgage would have been deductible. During the first year of the loan, the interest would have been $42,174 and entirely deductible. With the new tax plan, only the interest up to a $750,000 loan would be deductible. In the first 12 months, that would be $31,630.

Getting rid of these deductions helped pay for lowering rates and eliminating other taxes in the bill. But high tax states say it unfairly targets their constituents. These states also happened to have largely voted for Hillary Clinton in the 2016 presidential election.

"This is the first tax bill I've seen that seems so obviously targeted at Democratic strongholds, which tend to have higher income taxes," wrote Steven Bloch, a certified financial planner from The Colony, Texas, in an email.

And it's not just states in the Northeast.

Minnesotans with sizable SALT deductions and large families "are feeling this in a negative way," James Bryan, a certified financial planner from the North Star state, told NBC News.

The change lead to a flurry of activity from taxpayers trying to stem the impact. Lines snaked down the hallways of local tax offices as homeowners attempted to prepay their property taxes before the new year. Phones rang constantly at the offices of financial planners from anxious customers seeking advice. Taxpayers quickly wrote checks to charities to increase their contributions before the new higher standard deduction went into effect and they wouldn't be able to itemize.

Kim Holocher-Furletti, a New York-based web design consultant, said that she met with her accountant this week to strategize.

"It's not just the amount of your property taxes, it's the figure the IRS uses to calculate the fed deduction on the tax form. SALT deduction on last year's tax form was $24,000, but property taxes were $8,000. That $24,000 becomes $10,000 for 2018," she told NBC News.

To offset the impact, her family is going to try to use the two-family status on their home and rent to their business and find other ways to increase their business deductions.At this point, options for affected homeowners are limited.

Experts say taxpayers can increase federal withholding, pay estimated taxes during the year, cut back spending to offset the taxes — or move to a lower tax state.

That leaves it up to the elected representatives to fight back and the courts to decide. The governors say they're preparing a federal lawsuit, and will try to get other states to sign on.

"States are not colonies of the federal government," New York Governor Andrew Cuomo told reporters during a conference call Friday, the Hartford Courant reported. "This is purely double taxation. You are getting taxed on the state income tax and your property tax. … Legally, we believe there's a very strong argument that it's unconstitutional. … The federal government is trying to trample states' rights."

But those in lower tax states argue that the GOP tax bill is about flattening the federal tax code in a long overdue overhaul.

"In essence, the residents of low tax states are paying a higher percentage of their income for federal taxes because they did not have the same level of SALT deductions," wrote John T. Gugle, a certified financial planner from Charlotte, North Carolina.

"If residents of high tax states like New York, New Jersey, and Connecticut are upset, they should take this issue up with their state and local governments on why they are being burdened with such high taxes," he said.

And it's important to remember that it's too early to tell what the long-term ramifications will be.

"Homeowners with expensive homes might work in professions that benefit from the tax bill," Larry Luxenbeg, owner of the Lexington Avenue capital Management firm in Rockland, New York.

"It's not certain how it will shake out," he said, "and many people will benefit from the tax cuts."

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