Beginning in 2018, the Tax Cuts and Jobs Act of 2017 limits the deduction for non-business state and local income and real estate taxes to $10,000 per taxpayer per year. In an effort to provide a workaround for this at the state level, many states are considering or have enacted legislation, the intent of which is to provide a charitable deduction for payments to organizations controlled by state or local governments, in lieu of making income or real property tax payments.
For example, New York State has enacted legislation that would allow an individual to contribute funds to a designated NYS charity and get a receipt giving them a reduction in their NYS income tax liability equal to 85% of the charitable contribution. The legislation also authorizes localities to set up similar charitable funds which would offer a reduction of real estate taxes.
In response to these new laws and proposals, the IRS issued Notice 2018-54 announcing its intent to issue regulations addressing the federal treatment of such payments.
While the announcement does not say that the rules would disallow such transactions, the language of the Notice makes that result rather clear. The Notice describes these charitable contributions as “state efforts to circumvent the new statutory limitations” and goes on to point out that the regulations “will make it clear” that substance over form principles which govern federal income tax treatment of transactions will be strictly applied. Furthermore, the IRS stated that “the proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.”
We will keep you informed as additional information becomes available on these state laws and proposals, as well as similar legislation designed to shift nondeductible state personal income tax responsibilities for flow-through income back to the flow-through entities, in the form of unincorporated business taxes.
As always, if you have questions, please reach out to your Citrin Cooperman advisors or a member of the Firm’s Federal Tax Policy Team.
Ronald Hegt, CPA, is a tax partner with over 40 years of experience in accounting and taxation. He has managed corporate, partnership, and entrepreneurial high net worth individual engagements in both the tax planning and tax compliance arenas. He can be reached at 914-358-3342 or at firstname.lastname@example.org.