The U.S Department of the Treasury and the IRS on June 11, 2019, finalized regulations that govern the availability of charitable contribution deductions under IRC Section 170. The regulations aim to end state tax workarounds that attempt to circumvent the $10,000 limit on an individual’s, trust’s, or estate’s state and local tax deductions.
The Tax Cuts and Jobs Act created Section 164(b)(6), which limits to $10,000 ($5,000 if married filing separately) an individual’s deduction for the aggregate amount of state and local taxes paid during the calendar year. The limitation applies to all state and local taxes paid, including income and property taxes. It particularly affects taxpayers in high-tax states by potentially reducing the deduction for state and local taxes previously available. In an attempt to circumvent the limitation, many state and local governments have implemented tax credit programs under which taxpayers may receive tax credits in return for certain charitable contributions. The IRS addressed the wave of state workarounds in June 2018 in Notice 2018-54 and in proposed regulations issued on Aug. 27, 2018.
The final regulations generally follow the proposed regulations and require taxpayers to reduce the charitable contribution by the amount of the state tax credit received. However, Notice 2019-12 issued concurrently with the final regulations grants relief to individuals whose deduction for state and local taxes is less than $10,000 and who made a charitable contribution in exchange for a tax credit in lieu of paying tax to the state or local government. The safe harbor allows a state income tax deduction for the disallowed contribution as affected taxpayers would have been able to deduct the amount of the tax credit received had the charitable contribution not been made.
The following chart illustrates the impact of the safe harbor:
The Tax Cuts and Jobs Act created Section 164(b)(6), which limits to $10,000 ($5,000 if married filing separately) an individual’s deduction for the aggregate amount of state and local taxes paid during the calendar year. The limitation applies to all state and local taxes paid, including income and property taxes. It particularly affects taxpayers in high-tax states by potentially reducing the deduction for state and local taxes previously available. In an attempt to circumvent the limitation, many state and local governments have implemented tax credit programs under which taxpayers may receive tax credits in return for certain charitable contributions. The IRS addressed the wave of state workarounds in June 2018 in Notice 2018-54 and in proposed regulations issued on Aug. 27, 2018.
The final regulations generally follow the proposed regulations and require taxpayers to reduce the charitable contribution by the amount of the state tax credit received. However, Notice 2019-12 issued concurrently with the final regulations grants relief to individuals whose deduction for state and local taxes is less than $10,000 and who made a charitable contribution in exchange for a tax credit in lieu of paying tax to the state or local government. The safe harbor allows a state income tax deduction for the disallowed contribution as affected taxpayers would have been able to deduct the amount of the tax credit received had the charitable contribution not been made.
The following chart illustrates the impact of the safe harbor:
