On May 4, 2018, New Jersey Governor Phil Murphy signed S. 1893, state legislation authorizing localities including municipalities, counties, and school districts, to establish charitable funds for specific public purposes. This new state legislation is intended to mitigate the impact of the 2017 federal Tax Cuts and Jobs Act’s (TCJA) new $10,000 cap on the federal deductibility of state and local taxes (SALT). Because federal tax deductions for charitable contributions are not capped under the TCJA, taxpayers who itemize deductions on their federal income tax returns and are not otherwise limited in their charitable deductions may be able to circumvent the otherwise adverse impact of the $10,000 SALT limitation for federal income tax purposes. With this signing, State legislation now provides that individuals who donate to such a fund will be entitled to a credit of up to 90% toward their property tax bills. Those contributions could then be claimed as deductible charitable contributions for federal income tax purposes.
Under the TCJA, changes to itemized and standard deductions were made that impact a taxpayer’s entitlement to property tax deductions. State and local taxes can still be deducted, but the deduction is subject to a $10,000 limit ($5,000 for taxpayers who are married and filing separately), i.e., the SALT cap.
The New Jersey legislation provides for a workaround of the SALT cap by authorizing localities to establish charitable funds, and allowing the localities to provide a property tax credit equal to 90% of the contributions made to the charitable funds. The legislation allows anyone to donate to a charitable fund. However, to receive a credit against a property tax liability, the property owner must direct the donation to the local fund where the property is based. If the value of the credits exceeds the amount of tax owed, the credits may be carried forward for up to five years.
Given that U.S. Treasury Secretary Steve Mnuchin has publicly announced that the federal government will challenge the treatment of state taxes as a charitable contribution, and because such legislation could face legal hurdles, we advise that the possible use of this workaround should be discussed with one’s tax advisor prior to making any donation of this type. Additionally, it is unclear as to when the IRS will issue a formal opinion or guidance on this issue. Thus, it’s unknown when the risk may arise. If, as expected, the federal government challenges this strategy, and if the U.S. Treasury prevails, the IRS may deny the treatment of the payments as charitable contributions. Presumably, taxpayers who claimed such deductions would likely still receive a local credit on their property tax bills for 90% of their contributions, even if they would lose any federal tax benefit.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.