IRS issues proposed rules for charitable contributions made in exchange for state or local tax credits

On August 23, 2018, the IRS issued proposed regulations on the tax treatment of charitable contributions made in exchange for state and local tax credits.  In other words, this is when you make a charitable contribution and your state or local taxing authority gives you a credit against your taxes. In the past it was technically unclear whether you should get a full charitable contribution deduction for the amount of the contribution or whether the amount of the deduction should be reduced by the amount of the tax credit you receive.

For the purposes of this article, I’m going to abbreviate “State and Local Tax” to “SALT” and you’ll commonly see this abbreviation in tax publications. These taxes are typically income taxes, property taxes and sales taxes applied at the state and/or local level of government.

The general rule for charitable contributions is that you don’t get to deduct the portion of your deduction that is attributable to any goods or services that you receive in exchange for your contribution. One place you might have seen this is at a fundraising dinner and your ticket would say something like 50% of the ticket costs qualifies as a charitable contribution. The implication is that your dinner only cost 50% of what they charged you and the other 50% was a charitable contribution.

You might be wondering what this is all about and why did they need to write new rules. When Congress drafted the Tax Cuts & Jobs Act in December 2017, they limited the amount of the SALT deduction to $10,000. In places where there are high taxes, the total tax liability can easily be above $10,000. This limitation meant that you can only deduct the first $10,000 of you total state and local taxes beginning in 2018.

States realized this limitation would hurt their residents that pay more than $10,000 in combined SALT. In an effort to make it possible for their residents to continue deducting these taxes, some states came up with an idea that they would give you a credit against your taxes if you made a charitable contribution. For example, State A might reduce your taxes dollar for dollar if you give a charitable contribution to Organization B.

In terms of the general rule I told you about above, you could infer that a credit against your taxes is similar to getting something in return for making the charitable contribution. In this case, you might not be able to take that full deduction since you were receiving something of value in exchange for the contribution.

The new rules say that if you receive a SALT credit for the charitable contribution, you have to reduce the value of your charitable contribution by the value of the SALT credit you receive. This is what everyone expected all along, it’s just that now the IRS is putting it into writing.

An interesting twist is that the proposed rules are written to apply to contributions made after August 27, 2018. I’m not sure why they put this date in their unless they are admitting that if you make your charitable contribution before August 27, 2018, then you don’t have to reduce your tax deduction by the amount of the SALT credit you receive.

I still think there is a risk that the IRS could challenge this position on charitable contributions made before August 27, 2018. On the other hand, they chose to put this date in their rules so maybe they wouldn’t even challenge it. I am sure we’re going to hear more about this specific twist in the coming days. Until then, please talk with a tax professional before you make a quick decision to give a charitable contribution just to get a tax credit against your state and local taxes.

Because of the August 27, 2018 date is only a few days away you need to act FAST; however, please make and informed decision and have all your facts before you make the contribution.

For more information, see the IRS website or read the proposed regulations in the Federal Register.

As with all of my posts, this is not intended to be tax advice that you can rely on to take a deduction. It’s important to talk with someone specifically about your situation because there are a lot of variables that need to be considered to determine how this (or any) tax information will impact your tax return.

Please comment on this blog post or use the contact me page if you have specific questions for me.