IRS Issues Final Regulations, Bans Taxpayers from Circumventing SALT Deduction Caps by Karen A. Lake, CPA
Posted on July 09, 2019
by
Karen Lake
The IRS has officially shut down any plans that high-tax states had introduced to help their residents circumvent the new tax law’s $10,000 cap on deductions for state and local taxes (SALT).
According to final guidance issued by the IRS on June 11, 2019, taxpayers are prohibited from receiving federal tax deductions for the full amount of state and local sales, income and property taxes they pay to charitable funds. Rather, taxpayers must reduce their charitable deductions by the amount of any state or local tax credits they receive or expect to receive in return for their donations. This regulation applies to charitable contributions made by taxpayers, trusts and decedents’ after Aug. 27, 2018.
The new tax law’s $10,000 limit on SALT deductions represents the loss of a significant tax break for residents in high-tax states whose property taxes alone often exceed the new cap. To help their residents minimize the impact of this loss, states such as New York, New Jersey and Connecticut introduced programs to allow certain SALT payments in excess of the cap to be treated as tax credits for donations to state-run agencies or fully deductible charitable contributions.
To illustrate how taxpayers can apply the final regulations to their unique circumstances, the IRS provides the following example:
If a state grants a 70 percent state tax credit pursuant to a state tax credit program, and an itemizing taxpayer contributes $1,000 pursuant to that program, the taxpayer receives a $700 state tax credit. A taxpayer who itemizes deductions must reduce the $1,000 federal charitable contribution deduction by the $700 state tax credit, leaving him or her with a federal charitable contribution deduction of $300.
An exception is provided for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the amount transferred. Therefore, a taxpayer who receives a state tax deduction of $1,000 for a contribution of $1,000 is not required to reduce the federal charitable contribution deduction to take into account the state tax deduction; and a taxpayer who makes a $1,000 contribution is not required to reduce the $1,000 federal charitable contribution deduction if the state or local tax credit received or expected to be received is no more than $150.
In addition, the IRS issued proposed guidance that provides a safe harbor for certain taxpayers who itemize their deductions to qualify to treat payments disallowed as charitable contribution deductions as state or local taxes for federal income tax purposes.
Berkowitz Pollack Brant’s state and local tax advisors and accountants work with individuals and businesses across the U.S. and oversees to maximize tax efficiency while maintaining compliance with a broad range of complex and often conflicting tax laws.
About the Author: Karen A. Lake, CPA, is state and local tax (SALT) specialist and an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals and businesses navigate complex federal, state and local tax laws, and credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
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