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IRS Issues Proposed Regulations Regarding Charitable Deductions and State and Local Tax Credits

Charitable Deductions
September 12 2018

Regulations Address State Tax Cap Workarounds

By Gary Peiser

Are taxpayers allowed to deduct charitable contributions made to state charitable funds and still receive a corresponding state and local tax (SALT) tax credit on their state tax return?

That’s the issue being addressed by the IRS and the U.S. Department of Treasury in highly anticipated proposed regulations they issued on Aug. 23, 2018. The need for clarification arose from charitable workarounds made by several states as a result of tax reform changes from the Tax Cuts and Jobs Acts of 2017, which placed a $10,000 federal cap on allowed limits for SALT deductions. The charitable contribution strategies in high-tax states were created so taxpayers would be able to write off some or all of the donated amount from their federal taxes in the form of a state tax credit. The IRS has blocked such workarounds approved by New York, New Jersey and Connecticut for federal taxes, states which quickly enacted legislation permitting local governments to establish charitable funds to accept donations that the taxpayer would then receive as state tax credits equal to all or some of the donation made.

According to Treasury Secretary Steven Mnuchin, “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. The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions.”

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax-deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

For example, if a state grants a 60 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $600 state tax credit. They must then reduce the $1,000 contribution by the $600 state tax credit, which leaves an allowed contribution of $400 on their federal income tax return. The proposed regulation includes payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.

According to the IRS, the proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.

For details on submitting comments, see the proposed regulations.

Questions about your state or federal taxes? Contact the professionals at Goldin Peiser & Peiser or call Gary at 972-818-5300.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article. 

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