On August 23, 2018, the Internal Revenue Service issued Proposed Regulations governing the availability of charitable contribution deductions when a taxpayer expects to receive a corresponding state or local tax credit.
In response to the new limit on deductions for state and local taxes imposed by the Tax Cuts and Jobs Act of 2017, New York, New Jersey and Connecticut among other states enacted laws which enabled local governments to set up charitable organizations to accept property tax payments. In return, property owners would receive credits for those donations to offset federal taxable income as a charitable deduction.
Under the theory of "quid pro quo", the Proposed Regulations provide that taxpayers can receive a charitable deduction only for the difference between the charitable contribution they make and the state tax credit they receive. If a state allows a 70% tax credit for a charitable contribution amount, only 30% of that amount donated is allowed as a deductible contribution. By illustration, if a taxpayer contributes $10,000 to the charitable organization and receives a $7,000 property tax credit, only $3,000 would be allowed as a charitable deduction. There is a de minimis rule which allows a 100% charitable contribution in instances where the state tax credit would be 15% or less, and in instances where the contribution results only in a state income tax deduction.
States have already publicly indicated that they would litigate the imposition of the rules by the IRS. Taxpayers should proceed with caution before deciding to make such contributions with the knowledge that any proposed benefits could be limited by the IRS. For more information, contact us in one of our many locations.
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