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IRS Takes Step to Head Off State Charity Funds Designed to Bypass State and Local Tax Deduction Cap

September 2, 2018


 The Internal Revenue Service and the Treasury Department are following up on their threat to forestall attempts by states to get around the $10,000 limit in the Tax Cuts and Jobs Act on deductions of state and local taxes (SALT) by setting up state-run charitable contribution funds.


Last Thursday, the IRS and the Treasury Department issued proposed regulations aimed at stopping blue states like New York, New Jersey and Connecticut that have authorized such funds, and other high-tax states that have been considering them (see IRS moves to block New York, New Jersey plans to bypass SALT deduction cap). Under the proposed rules, the proposed regulations took effect on Monday, Aug. 27, giving taxpayers only a few days to make contributions to such funds, although for the most part they haven’t yet been set up except in a few parts of New York State (see New York taxpayers have four-day window to try to beat SALT cap). The proposed regulations still allow for contributions to existing state-run charitable funds that benefit schools and some other nonprofits, but with some limits.


Under the proposal, the regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. That means a taxpayer who makes a $1,000 contribution to an eligible entity isn’t required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.


Even before the proposed regs were released, Treasury Secretary Steven Mnuchin put the states on notice that the IRS likely wouldn’t allow attempts to circumvent the SALT deduction limits. In response, New York, New Jersey, Connecticut, New Jersey, and Maryland filed a lawsuit (see our previous post on Maryland's attempt).

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