The IRS is responding to the tri-state area trying to work around the new federal caps on deductions for state and local taxes. New York, New Jersey and Connecticut approved charitable workarounds following the $10,000 cap on state and local tax deductions. The IRS is saying those workarounds are not acceptable to the federal government.

According to the Treasury department, taxpayers who itemize will only be eligible for a federal deduction that’s a small fraction of their charitable donations for property tax payments. The charitable contribution strategy was created by states with high taxes, so their citizens could write off the full donation amount on their federal taxes. The Tax Cuts and Jobs Act created a $10,000 limit for state and local tax deductions (SALT). This change especially targeted Northeastern states that have some of the highest property taxes. The regulations released by the Treasury say taxpayers can receive a federal tax write-off equal to the difference between the state tax credits they get and their charitable donations. New York Governor Andre Cuomo and New Jersey Governor Phil Murphy signed legislation that allowed local governments to set up charitable organizations to accept property tax payments. In return, homeowners receive credits for those donations to offset federal taxable income. Other states have been looking at similar legislation but were waiting until the IRS released guidelines for the new tax laws before creating charitable funds.

This comes after four states have filed a lawsuit to have the SALT deduction cap struck down. New York, New Jersey, Connecticut and Maryland have sued the Trump administration saying that the new cap unfairly targets them.