Tax Alert: Proposed Regulations Limit Charitable Contributions Made in Exchange for SALT Deductions

On August 23, 2018, the IRS issued proposed regulations which provide new guidance on the amount of charitable contribution deductions a taxpayer would get if they receive or expect to receive a corresponding state or local tax credit. The IRS has unveiled these regulations to stop attempts made by the states to avoid the Tax Cuts and Jobs Act’s $10,000 limit on state and local tax (SALT) deductions.

The proposed regulations provide that the receipt of a state credit for charitable contribution is the receipt of a “return benefit” (quid pro quo benefit).  As a result, if a taxpayer makes payments or transfers property to Code Section 170(c) organization (eligible to receive tax deductible contributions), they must reduce their charitable deduction for federal income tax purposes, if they receive or expect to receive a state or local tax credit.

Important information on how the new SALT cap regulations will work:

  • These proposed regulations would apply to contributions after August 27, 2018.
  • A federal charitable deduction will only be allowed to the extent a contribution to the charity exceeds the amount of state tax credit generated by the contribution.
    • For example, if a taxpayer makes a $1,000 charitable contribution and receives a 70% ($700) state tax credit, the taxpayer will be able to claim a $300 tax deduction for the charitable contribution on their federal return.
  • A de minimis exception provides that if the taxpayer receives a state tax credit of 15% or less of the charitable contribution made, the taxpayer can deduct the entire charitable contribution.
    • For example, if a taxpayer makes a $1,000 charitable contribution, he/she is not required to reduce the charitable deduction if the SALT credit is no more than 15% ($150) thus enabling them to deduct the entire $1,000 on the federal return.
  • Charitable contributions for which the taxpayer receives a state deduction and not a state credit are not affected by these regulations.

Sax LLP will continue to keep you informed as new legislation is developed and additional information is released.  If you have any questions or concerns, feel free to reach out to a Sax advisor at (973) 472-6250.