Insights: Article

Change to Charitable Contributions Tied to State and Local Tax Credits to Take Effect

Some May Want to Accelerate Contributions Immediately

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.

Latest Insights

September 18, 2018
Tool
Get ahead of tax season with the Eide Bailly Tax Planning Guide. A supplemental strategy guide to help guide year-end and make the tax laws work for you.
September 7, 2018
Article
On September 5, 2018, the Internal Revenue Service issued IR-2018-178 to clarify their position related to business taxpayers implementing recently released proposed regulations.
August 29, 2018
Article
If your organization is participating in alternative investments, or is considering them, you may be impacted by the following tax liability and compliance issues.
April 12, 2018
Article
The Bipartisan Budget Act of 2015 (BBA) introduced new partnership audit and adjustment procedures for tax years beginning after December 31, 2017, that represent a dramatic change and could result in prior year tax adjustments altering current…
February 1, 2018
Tool
The 2017-2018 Pocket Tax Guide provides a quick view of tax updates, current rates and new tax law summaries for business, estate, general and individuals. It has been designed to be compact and folded into a pocket sized pamphlet.
January 11, 2018
Article
Tax reform is now reality. Last month, President Trump signed the largest tax reform legislation in more than 30 years. While many of the provisions that were initially proposed specific to exempt organizations did not make it into the final…
December 27, 2017
Article
Information returns (we're talking 1099, W2, etc.) are an important piece of your year end planning. Aside from remembering all the important deadlines for these returns, there's also the issue of what happens when they are not filed correctly.…
December 27, 2017
Article
If you have employees who travel, it's time to pay attention as the standard mileage rates have changed for 2018. The IRS recently announced that business standard mileage rates for 2018 have increased to 54.5 cents per mile.
December 12, 2017
Article
The Bipartisan Budget Act of 2015 (BBA) introduced new partnership audit and adjustment procedures for tax years beginning after December 31, 2017 that could directly effect a tax exempt partner's economics in the event of an IRS audit.