Current Law:
The Tax Cuts and Jobs Act of 2017 limits individual taxpayer’s state and local tax (SALT), itemized deduction to $10,000 (including real estate taxes). The previous law allowed an unlimited deduction. This change may be detrimental to many individual taxpayers who relied heavily on these deductions in the past.
State Work-Arounds:
Some states have considered “work-arounds” to combat this limitation. Select states (California, Connecticut, Illinois, New York and New Jersey, thus far) have created state funds for Local Schools, Colleges or other community-based activities. By contributing to these funds, taxpayers will receive a 100% charity contribution deduction (which has no limitation) on their federal tax return as well as a credit on their state income tax return. Essentially, a taxpayer would pay into these funds instead of using payroll withholdings, creating a charitable contribution deduction and receive a credit on their state tax return.
IRS Doesn’t Agree:
The IRS has already issued notice 2018-54 to indicate that they will combat these work-arounds. The IRS only allows a charitable deduction if “no compensation or benefit” is received for the contributions. Thus, the IRS may determine that by contributing to these state funds and received a credit on their state tax returns the taxpayer is receiving a benefit and therefore, no federal deduction will be allowed.
Uncertainty:
The new rules will impact the upcoming 2019 tax filing season (2018 Tax Period). The new rules have not been challenged as of yet, thus it is uncertain whether these new state funds hold water with the IRS.
It is important to discuss these tax matters with your accountant in order to better understand the risks associated with these tax positions.
As always, Zinner & Co. is ready to discuss the ever changing tax world. Contact us for more information!
