The U.S. Department of the Treasury and the Internal Revenue Service have published finalized statutes calling for taxpayers to lower their charitable contribution deductions by the amount earned or expected to earn in return for in-state or local tax credits. The IRS also stated that taxpayers could recognize payments in exchange for these credits as state or local tax payments, allowing some taxpayers to write off a certain amount of them as taxes.
Designed to illustrate the affiliation enclosed by federal tax rules and state and local tax credits for charitable contribution deductions, Treasury Decision 9864 concludes prospective regulations issued on August 27, 2018. More than 7,700 written comments throughout the comment period and 25 comments at the November 2018 public hearing helped influence the Treasury Decision made by the IRS and the Treasury Dept. Nearly 70% of the comments suggested that no changes should be made and the prospective regulations should be embraced.
The decided statutes predominantly support the content in the prospective regulations, which apply to additions made following August 27, 2018, and are active on August 12, 2019. A taxpayer disbursing payments, following the finalized regulations, to an entity qualified to accept tax-deductible contributions is required to decrease the federal charitable contribution deduction by the quantity of any state or local tax credit that the taxpayer earns or expects to earn in return. The statutes consequently pertain to payments made by trusts or decedents’ estates in defining their total charitable contribution deductions.
For instance, if a state grants a 60% state tax credit under a state tax credit plan, and an itemizing taxpayer provides $1,000 under that plan, the taxpayer acquires a $600 state tax credit. A taxpayer that itemizes deductions must decrease the $1,000 federal charitable contribution deduction by the $600 state tax credit, which means a $400 federal charitable contribution deduction would remain.
These statutes allow omissions for dollar-for-dollar state tax deductions and tax credits of up to 15% of the amount transferred. Therefore, a taxpayer contributing $1,000 and receiving a state tax deduction of $1,000 is not obligated to decrease the federal charitable contribution deduction to account for any state tax deductions. If the state or local tax credit earned or expected to be earned is no more than $150, a taxpayer who makes a $1,000 contribution is not obligated to decrease the $1,000 federal charitable contribution deduction.
Notice 2019-12, a safe harbor notice posted by the IRS, allows an individual who itemizes deductions to handle, in particular conditions, payments that are or will be excluded as charitable contribution deductions following the final statutes as state or local taxes for federal income tax purposes. To determine their state and local tax (SALT) deduction on their tax-year 2018 return, eligible taxpayers can use this safe harbor notice. Those who have filed already might be qualified to claim a higher SALT deduction by filing an amended return, Form 1040X, if they have not previously acquired the $10,000 maximum amount ($5,000 if married filing independently).
The Treasury Department and the IRS continue to consider issuing future direction on several issues suggested by commenters. For more information on these new regulations and other changes, contact your local CRI advisor.