On Tuesday, the IRS issued final regulations regarding the deductibility of charitable contributions when the contributor receives in exchange a state or local tax credit. These final regulations come about after New Jersey and many other states took efforts to lessen the negative impact caused by the $10,000 cap on a federal income tax deduction for state and local taxes (SALT) brought about by the 2017 Tax Cuts and Jobs Act.
By way of background, the 2017 Tax Cuts and Jobs Act capped the federal income tax deduction for state and local taxes at $10,000. For high property tax states like NJ, this had a tremendous negative impact as it could result in driving down property values, among other things.
In response, many states including NJ endeavored to come up with ways to blunt the negative impact of the SALT deduction cap. In May of 2018, Governor Murphy signed into law P.L. 2018, c.11 which authorized counties, school districts and municipalities to set up charitable funds which property taxpayers could donate to and in return would receive a credit on their property tax bill of up to 90% of the donation. This was labeled as a workaround for the new SALT deduction cap as under federal tax law deductions for charitable contributions remained uncapped. The idea was to re-categorize SALT payments as charitable contributions so taxpayers could once again deduct the full amount of their SALT payments on their federal income tax returns.
P.L. 2018, c.11 works similarly to programs that have been in place across the country for many years prior to the 2017 Tax Cuts and Jobs Act. Programs with this similar workaround have been scrutinized, and essentially approved, by the IRS in the past–although never approved through any formal rulemaking, but through informal guidance.
Seeing that many states were adopting these workarounds in response to the SALT cap, the Federal Administration, through the IRS, scrambled to prevent a key portion of the 2017 Tax Cut and Jobs Act from being undermined. In late August 2018, the IRS issued a notice of proposed rulemaking that would essentially overturn their previously issued informal guidance which allowed these workarounds and instead eliminate their effectiveness entirely.
Simply, the proposed, now adopted, regulations disallow charitable contributions from being deducted from federal income taxes whenever the contributor received in return credit for taxes at the state or local level.
While, under P.L. 2018, c.11, NJ municipalities still have the ability to set up a charitable fund to accept donations and provide a property tax credit, the underlying reason for a property taxpayer to contribute to these funds has been eliminated by the IRS regulations. The League is unaware of any municipality that has set up such a charitable fund, likely because of signaling from the IRS even prior to the issuance of draft regulations that the federal administration would seek to disallow such workaround. With this in mind, many were hesitant to go through the effort to create such a program.
Contact: Frank Marshall, Esq., League Staff Attorney, firstname.lastname@example.org, 609-695-3481, x137.