August 24, 2018
The IRS released Proposed Regulations on Charitable Contributions in Exchange for State and Local Tax Credits on August 23. The proposed regulations have provisions which will affect the federal deductibility of charitable contributions where the contribution is tied to receiving a state or local tax credit.
While introduced to offset some the recent actions of states to dampen the effect of the state and local tax limitation in the Tax Cuts and Jobs Act, the net thrown by the U.S. Treasury in the issuance of the proposed regulations could also change the tax benefit outcome of pre-Tax Cuts and Jobs Act state credit benefits on specialized state tax credits that were not put in place by states and local governments to offset the limitation of the state tax deduction under the Tax Cuts and Jobs Act.
According to an IRS release, under the proposed regulations, taxpayers who make payments or transfer property after August 27, 2018, to an entity eligible to receive tax deductible contributions must reduce their charitable contribution deduction by the amount of any state or local tax credit the taxpayers receive or expect to receive. For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible charity, the taxpayer must reduce the $1,000 charitable contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return.
The proposed regulations also apply to payments made by trusts or estates in determining the amount of their charitable contribution deduction.
An exception is provided for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible charity is not 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.
Effective for a contribution made after August 27, 2018, which is connected with receiving a state or local tax credit, the federal charitable contribution will be reduced, changing the anticipated economic overall benefit of the contribution. But, as you can see, there is a window of three days in which a contribution pledge could be accelerated and, arguably, not fall under the proposed regulations.