UPDATE 1-U.S. Treasury, IRS seek to block states dodging tax deduction cap

(Adds details about proposed rule)

WASHINGTON/NEW YORK, Aug 23 (Reuters) - The U.S. Treasury Department and Internal Revenue Service on Thursday moved to block high-tax states from helping taxpayers circumvent the new cap on federal deductions for state and local tax payments.

The Republican tax law enacted in December capped at $10,000 the deduction taxpayers can claim on their federal tax return for state and local tax payments, including property and income taxes, known as SALT. The deduction was previously unlimited.

New York, Connecticut, Maryland and New Jersey have filed a federal lawsuit challenging the constitutionality of the SALT deduction cap.

Other states are examining or have already enacted laws to help taxpayers maintain the lucrative deduction by establishing funds for public services to which taxpayers can make donations, receive credits against owed state and local taxes and then claim the charitable deductions on their federal returns.

"Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families," Treasury Secretary Steven Mnuchin said in a statement.

"The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions," he added.

The proposed rule would apply existing tax law related to charitable donations, which allows taxpayers to deduct only the net value of a charitable contribution after subtracting the value of any derived personal benefit, to contributions made to the tax credit programs being set up by high-tax states.

(Reporting by Amanda Becker and Laila Kearney Editing by Leslie Adler and Lisa Shumaker)