Changes to Charitable Contribution Deduction – August 27, 2018 Deadline Proposed

Planning on making an Arizona Tax Credit Contribution in 2018? You may want to make them by August 27, 2018!

Federal charitable contribution deductions must be reduced by the amount of state tax credit received by the taxpayer.

On Thursday August 23, 2018, the U.S Department of the Treasury released Proposed Regulations on the federal income tax treatment of payments and contributions made to state and local tax credit programs. The new Proposed Regulations state that a taxpayer’s federal charitable contribution deduction will now be reduced by the state or local tax credit received by the taxpayer. This Proposed Reg. is planned by the Treasury to be effective for payments/contributions made after August 27, 2018.

Background: Under the Tax Cuts and Jobs Act of 2017, the new law limits taxpayers to a state and local income tax (SALT) deduction of $10,000 a year ($5,000 in the case of a married individual filing a separate return). The limitation was a revenue raiser under the TCJA of 2017 by decreasing federal income tax deductions for high income earners who itemize and pay a lot of state taxes. Up until now, there existed an opportunity to circumvent the SALT limitation by making payments to a state or local tax credit program, whereby the taxpayer makes a donation to a qualified state or local charitable organization or governmental entity and receives a state or local tax credit reducing their state tax liability. The contribution was not subject to the TCJA of 2017 SALT limitation as it is treated as a charitable contribution for federal income tax purposes. As such, a taxpayer received the benefit of the state tax credit and also the federal itemized deduction as a charitable contribution. The SALT limitation was avoided by turning state and local income taxes into a charitable contribution for federal purposes.

Proposed Regulation: The new rules are in response to many states enacting new tax credit programs to circumvent the TCJA of 2017 SALT limitation. Some of these state tax credit programs existed prior to the TCJA of 2017, including many AZ tax credit programs.

Under the Proposed Regulations taxpayers will be required to reduce their federal deduction for charitable contributions by the state tax credit received when making the payment. The regulations provide for a de minimis exception to the reduction if the state or local tax credit does not amount to more than 15% of the payment. For most AZ state tax credit programs the benefit is dollar for dollar and would result in a complete reduction of the federal charitable contribution deduction.

The proposed regulations will apply to trusts and decedents’ estates as well.

Effective date: The Proposed Regulations do not provide much time for taxpayers to react. The new rule would apply to amounts paid by a taxpayer after August 27, 2018 (Monday). It appears that payments made before such date will still be available as full charitable deductions for federal tax purposes in 2018 without any reduction for a state tax credit benefit received by the taxpayer.

While the Proposed Regulations are not final, if you plan to make Arizona tax credit contribution payments at year end, you may want to hurry up and make them by August 27, 2018!

For more information, please visit our website or contact us at 520-624-8229.

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