The Treasury Department just made it harder for taxpayers trying to circumvent the $10,000 cap on the itemized deduction for state and local taxes (SALT).
The Tax Cut and Jobs Act rules on SALT deductions is a nightmare for folks in high-tax states where residents had previously benefited from being able to deduct much more. Some states such as New York, New Jersey, and Connecticut tried to find workarounds allowing taxpayers to donate to charitable funds and in exchange receive tax credits against their state or local taxes. Taxpayers could then deduct their donations as charitable contributions on federal taxes.
But under new regulations that take effect August 11th, taxpayers would only be able to deduct charitable contributions greater than the amount of the tax credit they received. For example, the taxpayer who makes a $30,000 charitable donation to pay property taxes and receives a $25,000 state tax credit would only be able to write off $5,000 on his or her federal tax bill.
There are some exceptions. The Treasury gave taxpayers some leeway if the state tax credit they received was for 15% or less of their donation. In those cases, taxpayers don’t have to subtract the amount of the tax credit from the charitable donations.
The final regulations apply to contributions made after Aug. 27, 2018. Along with the final rules, Treasury and the IRS issued a notice aimed at preventing taxpayers who itemize deductions on their federal tax returns, have less than $10,000 in state and local taxes, and donate to state tax credit programs from being hurt by the final regulations. A safe harbor has been included, subject to certain limitations (including the SALT cap), that allows individual taxpayers who itemize deductions to treat payments made in exchange for tax credits as payments of state or local taxes for federal income tax purposes. Eligible taxpayers can use the safe harbor to determine their SALT deduction for their 2018 return and can file an amended return if they have already filed.
The regulations also affect existing programs in many lower-tax states used to fund private education scholarships using the same structure as the SALT workarounds. Alabama, Georgia and Arizona are among states that for years have offered state tax breaks for charitable contributions to funds that raise money for private school tuition.
CONTACT US: States were unhappy with the news and most likely will pursue all options, including litigation, to fight the issue. Don’t wait until the last minute to do tax planning for 2019 – call our state and local tax experts toll free at 855-534-2727.
