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IRS Publishes Proposed Regulations Concerning Tax Credits

Last week we mentioned a few things to consider regarding 2018 taxes. Among those is the new $10,000 limit on state and local tax (SALT) deductions. Prior to the new law, SALT deductions were unlimited; now they’re capped.

In response to that, some state legislatures have proposed or even enacted provisions giving taxpayers a break by converting some SALT payments into uncapped charitable donations to the state. States have long been able to be recipients of contributions or donations that qualified as charitable contributions for tax purposes. As long as the SALT deduction was unlimited, the IRS didn’t worry about whether the taxpayer got a break for payments characterized as a SALT payment or for donations characterized as charitable. Now that SALT payments are capped, the IRS is claiming that these charitable deductions might be allowing taxpayers to avoid paying tax on the excess contributions above the $10,000 limit. An example of how this worked is, suppose a taxpayer grants a state a conservation easement over his land. Under state law, this grant entitles the taxpayer to a certain tax credit. In addition, the taxpayer is able to deduct an unlimited amount of SALT payments made, regardless of the value of the tax credit received from the grant of the easement.

What the new regulations propose is to require that any tax credit received by a taxpayer for a contribution to a state or local government be deducted from the value of the deduction. Here’s an example from the proposed regs:

Doing the Math

If a state provides a 70% tax credit for donations to eligible entities (whether government run or charitable nonprofit) and the taxpayer makes a $1,000 donation to an eligible entity, the taxpayer receives a $700 state tax credit. Under current regs, the taxpayer gets both the state credit and can deduct the full amount of the $1,000 donation from her federal taxes. Under the proposed regs, the $700 tax credit must be deducted from the $1,000 donation, leaving $300 available as a federal deduction.

Current Law
State Credit Federal Deduction
$700 $1,000
Effect of Proposed Rule
State Credit Federal Deduction
$700 $300

SourceProposed Regulations, Example 1, page 34.

These are only proposed regulations. The comment period extends to November 5, 2018. If you want to weigh in on this topic, use this link to reach the eRulemaking Portal, where you can leave comments. Be sure to indicate that you are commenting on IRS and REG-112176-18.

For more information on this topic, please see this article from the National Council of Non-Profits.


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