U.S. Treasury Issues Final Regulations Restricting SALT Deduction Workarounds
Under the TCJA, federal income tax law now limits the itemized deduction for state and local taxes paid during the calendar year to $10,000 for individual taxpayers ($5,000 for married filing separately). The loss of the full SALT deduction has been controversial and has led many states to consider alternative methods to preserve deductibility for their residents. For example, among other avenues, New York created various charitable gift trust funds, in an effort to enable individual taxpayers to make charitable contributions to the state for health care and education spending. Taxpayers who made contributions to these funds would in return receive a tax credit equal to 85% of the donation amount against their state and local tax liabilities. Subsequently, such taxpayers could then treat the donations as fully deductible charitable contributions on their federal tax returns – charitable contribution deductions are not subject to the same $10,000 cap.
The recently issued final regulations aim to prevent this technique from working by seeking to apply long-standing quid pro quo principles. Under these, when a taxpayer receives a benefit in return for a charitable donation, the taxpayer can deduct only the net value of the donation as a charitable contribution. For example, if a state grants a 70% state tax credit and the taxpayer pays $1,000 to a charitable organization, the taxpayer will receive $700 in state tax credit. The taxpayer must then reduce the $1,000 contribution deduction by the $700 state tax credit, leaving $300 of allowable charitable contribution deduction for federal income tax purposes.
The final regulations further provide safe harbor exceptions for dollar-for-dollar state tax deductions as well as for tax credits of no more than 15% of the amount contributed. In other words, a taxpayer who receives a state tax deduction of $1,000 for a contribution of $1,000 is not required to reduce the federal charitable contribution deduction to take into account the state tax deduction. Further, a taxpayer who makes a $1,000 contribution is not required to reduce the $1,000 federal charitable contribution deduction if the state or local tax credit received or expected to be received is no more than $150.
The final regulations are effective Aug. 11, 2019, and apply to contributions made after Aug. 27, 2018.
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. 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 members, 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.
InsightConnecticut Governor Signs State Budget; Expected to Sign Sales Tax Marketplace Bill and a State Charitable Deduction BillWith near unanimous support, the Connecticut General Assembly approved a bipartisan – $20.86 billion – budget (Bill 543) for the 2018-2019 fiscal year.
InsightIRS proposes expanding highly taxed exclusions for GILTI tested incomeThe IRS recently proposed allowing taxpayers to elect to exclude highly taxed income generally from CFC tested income for purposes of the GILTI provisions. The new rule is unlikely to apply before the 2020 tax year, depending on taxpayer’s situation and when IRS finalizes change.
InsightSupreme Court rules against North Carolina’s imposition of taxIn North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, U.S., No. 18-457, the U.S. Supreme Court unanimously ruled against North Carolina’s imposition of tax as unconstitutional.
InsightTax-exempt groups face new IRS e-filing rules under TFAOn June 13, the Senate voted to approve the Taxpayer First Act (TFA), H.R. 3151. Previously approved by the House, the bill now awaits President Trump’s signature. The main focus of the TFA has been to improve overall customer service by the IRS through changes within the agency’s management and oversight.