TODAY, August 27, 2018, is the last day to make contributions to charitable funds that reduce state and local tax liabilities. New regulations will take affect that will limit the charitable deduction.
The IRS just released the proposed regulations (REG-112176-18) pertaining to the deductibility of state and local tax (SALT) payments for federal income tax purposes. The regulations would essentially prevent states from circumventing the $10,000 cap on the federal SALT deduction for individuals, estates, and trusts, which was recently passed as part of the 2017 Tax Cuts and Jobs Act. It is likely that the Regulations would also affect other state programs concerning charitable contributions as well as state tax credits. New York, New Jersey and Connecticut, three state with very high property taxes, had put legislation in place to help taxpayers bypass the limit on the deduction. Those plans included permitting municipalities to set up charitable funds and allow taxpayers to contribute to them. The effective date of the proposed regulations is August 27, 2018.
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 70% state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regs also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.
At the end of last year, some taxpayers prepaid a portion of their property taxes in an effort to lessen the blow from the new federal cap on state and local tax deductions. It should be noted that New York, New Jersey, Connecticut and Maryland have filed suit against Treasury and the IRS, alleging that the $10,000 limitation on SALT deductions is an “unconstitutional assault on states’ sovereign choices.”
We are available to help you navigate this new landscape in state tax law and how it will impact you. Please contact your tax advisor or Faith Gorman, Director – State & Local Tax, at firstname.lastname@example.org or 561.886.5286.